Joel Swider

Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA

Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA

In this interview, Joel Swider sits down with Neil Eicher, Vice President of Government Affairs with the New Jersey Hospital Association, to discuss a recent bill that was signed into law in New Jersey related to property tax exemptions for nonprofit hospitals. The law brings resolution after almost 6 years of uncertainty in the wake of the NJ Tax Court decision in the Morristown Medical Center case which jeopardized hospital property tax exemptions in New Jersey. The interview covers the New Jersey statute as well as strategies for protecting property tax exemptions in other states through legislative efforts.

Podcast Participants

Joel Swider

Attorney, Hall Render

Neil Eicher

Vice President of Government Affairs, New Jersey Hospital Association

Joel Swider: Hello, and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider an attorney with Hall Render, the largest healthcare-focused law firm in the country. Our guest today is Neil Eicher, who is vice president of government affairs with the New Jersey Hospital Association. We’re going to be discussing legislation that was recently signed into law to restore property tax exemptions for nonprofit hospitals in New Jersey, but which also requires nonprofit hospitals to pay certain community service contribution payments, which we’ll get into in more detail. Neil, welcome back to the podcast.

Neil Eicher: Thank you, Joel. Thank you for having me and you guys do great work on this issue, so I appreciate being a part of it.

Joel Swider: Well, thanks Neil. So before we can understand and appreciate the text of the bill itself, that was recently signed into law, I think it would be helpful to explore some brief background of hospital tax exemptions in New Jersey. I think that there’s really a broader applicability here in other States where we’ve seen the gradual chipping away of property tax exemptions for nonprofit hospitals. And so I think the process is in some ways, just as important as the result, particularly for those who are looking at this case and who’ve been watching it as we have from other States looking to see what that’s going to look like in New Jersey in the future and how it might be translated or mistranslated in other States and other contexts. So, Neil, could you give us a little bit of a lay of the land? What did the landscape look like pre Morristown, which was the case that really sort of brought this issue to a head in 2015?

Neil Eicher: Yeah, sure thing. So the Morristown Memorial hospital tax court decision was a pivotal moment for the industry. As you said in summer of 2015, it’s sort of unexpected rolling from one tax court judge in New Jersey, challenging Morristown property tax exemption. Now, they had been in litigation for almost 10 years with a town that included, multiple mayors moving in and moving out, even a change in administration at the hospital level. So it did kind of predate when the decision was actually made. But the judge in that ruling, as I said, stated that Morristown should be paying property taxes. It wasn’t precedential, but it was certainly influential. And then it resulted in NJHA as the advocacy wing to start pushing for a legislative solution because the judge did actually make that statement.

Neil Eicher: And his court decision was that although they should be paying property taxes, the legislature needs to step in. And it’s interesting because our statute on tax exemption, property tax exemption goes back. I want to say 70 or 80 years. And in that exemption, there was no carve out for for-profit medical providers within a nonprofit hospital. So while we disagreed with the rolling for a variety of reasons, the fact that the judge said we need to step in and get a legislative solution is what changed the landscape for us.

Joel Swider: Okay. So what did happen after the Morristown Medical Center case? What has happened sort of bring us up to this current bill that was passed last month and signed what’s been happening in the intervening years. I know you guys have been working at this for a long time.

Neil Eicher: Yeah. So after the decision was rendered, we knew we had six months or so until the end of our legislative session to pass a bill. And again, this is in 2015. So we did pass a piece of legislation, very similar to what has been signed into law six years later. But unfortunately it was vetoed by the governor at the time and what we were afraid of and what actually happened was with the beginning of the tax year in 2016, we saw a flurry of litigation. In some cases, it’s the town putting the hospital on the tax rolls. And it’s the hospital that initiated the litigation. Sometimes it was the reverse, we had to deal with omitted assessments, which is just a clever way of kind of looking back at retroactive tax years up to two years prior to put entities back on the tax roll.

Neil Eicher: And then I think when we’re all said and done, we probably had 40 to 42 of our 59 nonprofit hospitals engaged in litigation. Now I should note that some of them settled, they had agreements with their towns. Ironically enough, many of those agreements were similar to the community contribution fees in this law, but they had expiration dates. Other hospitals were just involved in litigation and then some other hospitals didn’t see any lawsuits at all.

Joel Swider: So then leading up to, you mentioned there’ve been other attempts over the years, leading up to the current bill that was finally passed and signed. Even that once it was introduced in January, 2020, took over 13 months until it was finally signed. Was there more give and take at this time around as well?

Neil Eicher: Yes, absolutely. It was a very arduous legislative process. We’re happy with the result so we can kind of look back at it and figure out what worked and what didn’t, what started, having the speaker of our general assembly as the prime sponsor and only sponsors, five or six bills in a session that was a positive signal and also getting our Senate, President and Governor on board early, at least conceptually was important. What happened in practicality is as the bill started to move, we started to hear, or the legislators started to hear from very influential mayors who had problems with what this bill might mean for them, at least according to what their tax assessor told them, what they could get out of the hospital, if there was full property taxation on the facility.

Neil Eicher: So we did a lot of behind the scenes work with local mayors, local hospitals tried to resolve very territorial type of issues, but it actually worked as a benefit because what we were seeing was the creation of an adversarial relationship between the towns and the hospitals that didn’t exist prior to this Taxport decision. And having this discussion kind of helps move that smooth that over. So some of the amendments in the law dealt with, for example, walking in or grandfathering in current agreements that are in place between a town in a hospital, that would be the floor. If the legislation, or I guess the law will say, if it has to be greater, the hospitals is obligated to pay more. But that took care of a couple of towns. We made some changes to the offsite for-profit medical providers made it very crystal clear that the medical provider had to be exclusively working with the hospital for a hospital purpose.

Neil Eicher: That was an issue from some legislators previously thinking that non-profit hospitals would all of a sudden purchase a bunch of for-profit medical provider buildings, take them from tax paying entities to non tax paying entities. That was not the way we read it. And it’s obviously was not our intention, but we needed to make necessary changes. And then the last thing I’ll say, Joel, is you might may have noticed if you follow this at all, we went from $2 and 50 cents per bed, per day, contribution to the town, to $3 per bed per day contribution. That was because the governor’s office wanting to get a little bit of a higher rate from hospitals to towns. So that obviously we had to discuss that for a while, but we ultimately agreed to it. And there are other small changes, but those were the main ones.

Joel Swider: Well, Neil, let’s dive into the meat of the law a little bit, this nonprofit hospital property tax bill, or a 1135, as it’s been called, going through session, let’s start with what type of property or property owner is subject to the new law?

Neil Eicher: We first specifically to a nonprofit hospital. I’m sorry, nonprofit general acute care hospital. That’s important in case you’re a specialty hospital, rehab hospital. And according to your State’s definition of licensure for a general acute care hospital, that’s important, but for our purposes, for New Jersey’s purposes, a nonprofit general acute care hospital. So it’s that building in any other building that’s utilized by the nonprofit hospital solely for hospital purposes. As I mentioned previously, if it’s a for-profit medical provider, it has to be exclusive to that hospital who does this apply to and in all practicality, it’s your ER groups that maybe you contract with, maybe you have an anesthesiology group or wing cardiology, all the wrap services, pathology, those that may have for within your hospital, maybe it’s an attached wing of your hospital, but this is an important point of clarification because this had stalled the bill as well.

Neil Eicher: If you have, let’s say a for-profit medical provider group that is renting space or attached to the hospital or attached to the hospital and renting space, and they provide some assistance to patients from the hospital. So if it’s a cardiology group and let’s say they do 40% of services for the hospital, but they have 60% of patients come as walk-ins, they would not allow that part of that wing, that building would not receive a property tax exemption. They would still be required to pay property taxes. The normal arrangement is through the lease agreement with the hospital.

Neil Eicher: So we made it very clear. It has to be pretty much, well, it has to be a hundred percent of what that group does is for the hospital purpose. It also, if you have a McDonald’s, if you have a Starbucks within your hospital, that will remain taxed. Usually again, it’s done between the lease agreement with the facility that will not change. The cafeteria, however, would fall under the property tax exemption.

Joel Swider: Okay. So if you have an exemption, you qualify, you’re a general acute care hospital, you qualify for exemption, but there’s also this element of a community service contribution. What does that mean? And what does that look like?

Neil Eicher: So because of the statute that we were dealing with about the inability for Eddy for-profit activity to occur in a nonprofit entity to get property tax exemption, we recognize that with for-profit activity occurring in these hospitals, that we needed to modernize the law. It could be those groups that I mentioned previously, or it could be a specialist that has privileges in a hospital, whatever it may be, at least in New Jersey, there are for-profit entities working in a nonprofit entity and it puts our statute in jeopardy. So recognizing that things have changed, what we agreed to was that in exchange for, I guess, the codification or update to our property tax exemption, we would pay a fee to the town because we are also getting bigger. We are utilizing more municipal services. So as a recognition and actually just from the get-go trying to be a good player with the towns and not just try to railroad through something, we thought we would try to find that fair balance and at $2.50 at the time, the contribution will be $2 and 50 cents per bed per day, to each town.

Neil Eicher: I will note that you are, as a hospital, able to deduct any agreements that you already have. We call them voluntary agreements. Most people know them as pilots. We stayed away from the word pilot because there’s a strict definition in New Jersey statute that may have brought on issues after this became law. So we just call them voluntary agreements, voluntary arrangements. So if your obligation of now it’s up to $3 per bed per day, is $500,000 to your town. You have an agreement for $300,000 each year, maybe to pay for a public nurse in the school system, redo a park, whatever it might be, or just general money. You’re able to deduct that 300,000 from that 500,000, therefore you would owe $200,000 a year.

Neil Eicher: It would never go reverse. If your agreement is more than the requirement here, you can’t obviously deduct that. But that was again, a good faith effort by us. We just wanted to turn the spigot off of all these lawsuits, put something in there that was a fair that the towns would get something. And then we wouldn’t be spending money on legal fees. So that, that was the purpose of the community contribution that we thought it was important to be a good partner with our towns.

Joel Swider: That makes sense. And Neil, I mean, this applies to a lot of hospitals. I know you, you gave a couple of specific examples in some sort of variations of the general acute care hospital, but I mean, that’s a majority of New Jersey’s acute care hospitals will probably fall into the ambit of this statute. Is that right?

Neil Eicher: Yeah. Correct. We have 59 non-profit hospitals and 71 acute care hospitals.

Joel Swider: Okay. So are there any carve-outs from the ambit of the statute or other clarification’s that we should be aware of in terms of how this shook out?

Neil Eicher: I mean, I think it’s important to understand kind of your for-profit medical providers, the buildings associated with your nonprofit hospital, how it’s structured under your license. I think that’s very important. So I did talk about that, but I will say we did get abdication carve out. We have a specially cardiac hospital in New Jersey that doesn’t bill patients. They have a special OIG opinion from the federal government to have this exemption, not to, for example, go after Medicare patients for balanced billing. So we did insert a section in there that exempted them and that actually made it into final law.

Neil Eicher: So let’s say, other than that, no other real carve-outs, no hoodwinking that we were trying to do, we try to be as transparent as possible, where we needed the clarification, like I said on off-site for-profit medical providers and whether we’re going to buy them up and switch to property tax status, we made it very, very crystal clear that that wasn’t the intention. But it was very important to us on the for-profit medical provider to get that exemption for the emergency department. For example, if you have a for-profit medical group, if you have the third floor of your hospital has a cardiology group, that needs to be exempted. So other than that it’s pretty straightforward with, again, nonprofit general acute care hospitals.

Joel Swider: So Neil, as I read this statute and I’ve read now a number of them from other States, I find it to be pretty comprehensive in terms of, it’s pretty clear about its scope. It’s pretty clear about how it applies and how it works. There are two things that caught my eye though, as potential wrinkles, I guess you could say in terms of how this is going to be implemented, one of them is that there’s language requiring the New Jersey healthcare facilities, financing authority, and the director of the division of local government services to adopt regulations, to effectuate the bill, where do you see that going? And it sounds like it has to be done within four months following enactment and which may or may not end up taking place, but any thoughts on the regulatory aspect of this?

Neil Eicher: Sure thing. And I think it’s good for listeners to consider that in their own state. A lot of times when we have legislation going into the water, there is a requirement for the promulgation of regulations, but it’s very clear, from previous experience, that a statute is a statute. So you still have to implement it, still the letter of the law, even if the regulations don’t come. So you’re correct. There needs to be regulations within four months. I doubt that our department will meet that deadline. It’s been very difficult previously. And then of course we’re still trying to get out of COVID and a lot of other things that are affecting the work of the department. So I personally do not expect them to meet that four month deadline. However, what was important to us and maybe another consideration for your list just to make the language as specific as you can.

Neil Eicher: And even some of these provisions need further clarification. After six years, we tried our best to make it as clear as possible, but we still need some guidance on a few things from the various departments, but we did make a conscious effort to make it as specific as possible. So that once the bill was signed into law, we knew what to expect. Our members certainly knew what to expect following this for years and most of the towns as well. So I do think they’ll get to regulations eventually, but right now, we’re just kind of moving forward with our interpretation of the law until we get that guidance.

Joel Swider: So near the other wrinkle, if you will, that identified as I was reading it was, there’s a non-profit hospital community service contribution study commission, which has set up, which has as its goal, sort of looking at the financial impact, analyzing, analyzing the financial impact on effected hospitals and municipalities among other things. And I guess, again, as an observer from another State and who represents clients in additional States, I think it’s really interesting. I will really be curious to see how the study commission reports shake out and what is found, but could you give me a little bit more color to why that was in there and what the goal of it is?

Neil Eicher: Yeah. Yeah. You and me both, I’m interested to see what they come up with. We thought again, because a lot of this language was actually taken from our original bill that went forward in 2015. And the purpose of this bill, originally, I guess it still is, was to provide a stop gap, to put a pause on a lot of the legal suits because no one has really examined the role of healthcare entities, hospitals in particular, and how it relates to property taxes, New Jersey, by the way, has the highest property tax rate in the nation because we, variety of reasons. So property taxes are very, you know, interesting phrase here. So we needed, you know, some experts kind of sit down and take a view of the changing landscape of healthcare changing landscape of towns and property taxes.

Neil Eicher: So, that was the purpose. At the time the $2.50 now $3 contribution was meant as a stop gap. We knew that we needed to start paying something two minutes to Powell these, and by the way, it’s pretty much, it’s about 20 to $21 million a year annually, collectively in New Jersey. But we want this commission to review everything. And if they say, you know what, $3 is too low, we’re going to have to swallow that and accepted. Luckily, we have some good representation. One of the amendments that the governor’s office asked for some additional person from the governor’s office to sit on ex officio. So I do think this will be helpful and understanding kind of as we move forward. However, one thing I neglected to mention about the community contribution fee is that each year it goes up with an inflator of 2%.

Neil Eicher: So at minimum, it goes up 2% moving forward. So again, for the hospitals that are listening, this might sound like a good deal for the towns, even though they lobbied against it, but this bill and this law is essentially the floor of what hospitals must pay. Things will always continue to go up. So we needed to make sure the study commission was there, but at the same time, it is balanced. So it’s not swayed one way or the other, but Joel, kind of to your question about regulations, when that’s going to come, I know there are strict deadlines for this, but it’s possible that this doesn’t meet in a timeframe that the put in the bill.

Joel Swider: So Neil, let’s turn to the subject of sort of the effect or the fallout, if you will, both positive and potentially negative of the legislation. I think in some ways beauty’s in the eye of the beholder, but Kathy Bennett, who’s the president and CEO of the New Jersey Hospital Association, seemed overall positive about the new law in the news reports that I read. She said it was the right solution. And I do think that, I mean, just my personal opinion is that NJJ has done a great job of taking into account the various perspectives here and coming up with a solution that is equitable, but also puts New Jersey hospitals in your membership, in a better position than they were for the past five, six years and maybe more. Do other healthcare leaders in community organizations feel the same way about the bill or what sort of the anticipated effect?

Neil Eicher: Sure. So we were very as an association and by the way, where we represent all the hospitals in New Jersey, I know that’s somewhat unique in many States, so it’s-

Joel Swider: So it was sort of everybody

Neil Eicher: Everybody. Yeah. So we have a for-profit non-profit that adds up to 71 hospital members. We have 250 to 275 post-acute specially care type of maybe not core members, but affiliated members, business members, et cetera. So we count over 400 members in our membership, but of course our core membership is mostly general acute care hospitals for-profit and nonprofit, but we also have some behavioral health facilities and other post acutes that are core members. But to your point, everyone, all the non, all the acute care hospitals supported this, membership completely supported this. It was difficult at times going from $2.50 to $3 to make sure everyone’s comfortable with that. I should note I won’t name, but there was one health system that had four hospitals in New Jersey that had no pending litigation that wasn’t very happy with it. They were fine with MGHA pursuing and they were absolutely great partners in it, but they just made it clear that they didn’t support it.

Neil Eicher: It would mean over a million dollars to them each year that they would have to pay. There are other categories of members who may not have had lawsuits, but also knew that they could be next and we’re supportive. I think it was also supported by maybe not very publicly, but nursing home health associations, others that were nonprofits, but thought that maybe they could be next. Educational institutions also were supportive. We got the council, the center for nonprofit hospitals or sorry, center for nonprofits in New Jersey to be supportive because of kind of the snowballing effect that could happen watching what would happen to our hospital. So we did have some kind of ancillary support and really the only, the only opposition was the advocacy group that represented the towns, it kind of depends on your perspective.

Neil Eicher: They were making a case to their mayors, that hospitals needed to be taxed, a hundred percent of the market rate. We believe that we shouldn’t have need to pay anything, but at least we came up with a compromise, the pay something, again, over $20 million a year, the other side just fought it and wanted a full payment. So I think in general, just some of, I think in general, a lot of the healthcare leaders understood this was important to get this codification, even those who are advocacy groups for patients, et cetera, knew that we were spending money on legal fees. And as a nonprofit, you have to report to your board, you have certain community benefit requirements. So they knew we could put that money back into care. So I’m glad we got this done. And I think we had the right amount of support.

Joel Swider: So Neil, maybe to close here, I’m curious as well, you mentioned the towns and the advocacy against this effort, which sort of surprises me in some ways since the statute previously allowed for exemption. And it really wasn’t until Morristown, that was even in question, but what is the anticipated effect on legislation, excuse me, on litigation that was ongoing at the time that this was signed or maybe really everything that’s kind of come out since Morristown, what will happen with that litigation and what do you see there happening?

Neil Eicher: That’s a very good question. And I’m happy to be able to explain this a little bit. And again, every state’s different, but I think there might be some crossover on this statement, but with the legislation being signed into law, it codifies our property tax exemption. It refines the statute for the exemption. As I mentioned before, requires the community contribution fee. However, everyone wants to meet. Everyone must remember the separation of powers between the executive branch and the judicial branch.

Neil Eicher: So yes, the statute will go into effect, but it cannot throw out the lawsuits and the litigation that’s currently taking place between towns and hospitals. That’s the legal interpretation from our council. However, in all practical sense, since we only have three or four tax court judges, and our counsel has been the ones representing those, the hospitals, she has told us that every judge has been looking at the progress of the legislation and art, and they are going to point to the legislation as kind of the solution.

Neil Eicher: So for those of you, or you may maybe council or are looking at from a legal sense, it’s important to understand that just because you pass a law, doesn’t necessarily mean it overturns a tax court decision, but it will be very influential and making their decisions. So if you’re thinking about going our route and trying to make a lemonade out of lemons and just kind of dealing with a bad situation that was put in front of us, I would encourage you as you go through the legislative process to also think about how you can make sure the judicial branch is aware of what you’re trying to do before moving forward.

Joel Swider: Well, thanks so much for your time and expertise, Neil, and congratulations on getting this bill finally negotiated and signed into law. Where can our listeners go to learn more about the law or about your work at NJHA?

Neil Eicher: Sure. No. And, and thank you for having me. njha.com. Please visit us. We have a lot of different things that are available for non-members a non password protected that you can visit. My email is an eicher@njha.com always feel free to send me a note. Again, it’s eicher@njha.com. I’m happy to talk about this. This was six years in the making happiness done, still more to do, but yeah, I’d be happy to talk to anyone who wants to learn more about this.

Joel Swider: Great. Well, thanks again, Neil, and thanks to our listeners for joining us today. If you liked this podcast, then please subscribe and leave feedback for us using your Apple or Android device. And if you’re interested in more content on healthcare real estate, we also publish a newsletter called the Health Care Real Estate Advisor. If you’d like to be added to the list, please email me at jswider@hallrender.com.

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The “New Normal” for Managing Medical Office Space

The “New Normal” for Managing Medical Office Space

While the CDC and other governmental and trade groups have issued wide-ranging guidance on “reopening” medical office space in light of COVID, the realities are that these spaces never truly closed, and furthermore, it would be nearly impossible to abide by all of the standards that have been published. This session instead focuses on what hospitals and other MOB operators are actually doing from a facilities perspective to manage medical office space to reduce the risk of liability.
Attendees will:

  • Learn about industry trends and best practices for operating medical office facilities in light of COVID
  • Hear tips on reducing liability for COVID-related legal challenges that may be brought by patients and other users of medical space
  • Have an open forum to discuss experiences managing medical office space with similarly situated individuals navigating this complex issue

Podcast Participants

Joel Swider

Attorney at Hall Render

Julie Carmichael

Advisor at Hall Render Advisory Services and President of Carmichael & Company

Mark Theine

Executive Vice President – Asset Management at Physicians Realty Trust 

Ryan Walters

Senior Real Estate Manager at Providence St. Joseph Health

Today we’re presenting The “New Normal” for Managing Medical Office Space, presented by Hall Render with a few guests.

Joel Swider: Thanks, Julie. And thanks so much to those joining the call for investing some of your time with us today. I’m Joel Swider and I’m a healthcare real estate attorney at Hall Render. Today we have a very experienced and distinguished panel here to talk about The “New Normal” for Managing Medical Office Space.

Joel Swider: We at Hall Render have had clients ask for the past year or so guidance about reopening medical office space post lockdown. And the reality is that most of these spaces never truly closed. And so owners and operators of medical office space have really had to learn and implement new procedures on the fly.

Joel Swider: We’re not really concerned as much anymore with reopening or getting ready for COVID, but we’re dealing with operating in this new reality, which we’ve called the new normal that we all have to navigate. So our goal in our discussion today is that whatever your role is in this industry, that you will come away with new ideas, fresh perspectives. Something that you can apply to be more successful in your day-to-day role, as it relates to COVID preparedness and liability protection.

Joel Swider: So I guess at this point, I’d love to have our panel introduce themselves. Julie, could you tell us a little bit about yourself and your background in this topic?

Julie Carmichael: Sure. It’s nice to be here today. Thanks everybody for logging on. My name’s Julie Carmichael, I’m a healthcare consultant in Indianapolis. I have a consulting business that I started about six years ago. Prior to that, I was the chief strategy officer for Ascension St. Vincent in Indiana. And I had responsibility there for all of our real estate and design and construction. So I have a practical hands-on experience in this area. And then I work today with health systems and private physician practices and get involved in quite a bit of their real estates and medical office issues. So glad to be here.

Joel Swider: Yeah. Well, thanks for being here, Julie. Mark.

Mark Theine: Yeah. Joel, thanks to you and thanks to Hall Render for including us on the panel. I’m really privileged to be here, appreciate it. So again, my name is Mark Theine. I’m the EVP of asset management for Physicians Realty Trust. We are a publicly traded REIT under the ticker symbol DOC. D-O-C go by a lot of times. So our portfolio today is about five million in healthcare real estate investments located in 36 States across the country. About 15 million square feet. So it’s really been interesting managing our portfolio through the [inaudible 00:03:00] and then the care nationwide and watching into this, we’ve had different spikes in different regions. So hopefully can bring a little perspective to that, but day in and day out. My role as the lead in the operations team is release asset management, property management, leasing in capital construction.

Joel Swider: Great. Well, thanks again, Mark and Ryan.

Ryan Walters: Yeah, thanks for the invite. My name’s Ryan. I’m our senior real estate manager for Provenance in the Washington and Montana region. Less are a big Swedish portfolio over in Seattle. So we’re across seven States, each area is broken up with a different real estate manager.

Ryan Walters: So today I’ll talk about our portfolio across Washington, Montana. It’s about 275 properties, mostly MOBs, but we have office buildings, industrial, land, and all sorts of fun gifts that people have donated. So I’ll try to talk mostly about the MOB perspective. We have a team of property managers at CVRE and Kiemle Hagood that are really out, seeing what the differences and implementing all these new best practices for us. So try to talk to some of those and what our technicians are seeing. So before this, I was a property manager and broker at Kiemle Hagood in Spokane, I guess that’s me.

Joel Swider: Great. Well, thanks again to our panel and for your time and expertise, by the way if those of you listening today enjoy our discussion. We have three additional ways that you can connect with us and continue the discussion on healthcare real estate. First is to consider subscribing to our podcast, which is called the Health Care Real Estate Advisor. And you can find it on the Apple Podcast app or on our website.

Joel Swider:The second is we publish a monthly newsletter with news and insights related to healthcare real estate. And if you’d like to be added to that list, please reach out to me by email, jswider@hallrender.com.

Joel Swider: And third, I want to let the group know that we have another of these round table discussions similar to this happening on February 25th on healthcare real estate strategy consideration. So it’s sort of an offshoot of today’s discussion where we’ll be talking about the impact of COVID, recent regulatory updates and other trends on the broader strategy discussion.

Joel Swider: So I’m very excited to hear from our panelists. I want to give one or two quick backdrop notes from a legal perspective, because I think that we will find through this discussion that this is really more of a practical issue than a legal one.

Joel Swider: From a legal perspective, medical office space is really distinguishable from inpatient space in terms of the regulatory environment. So any certified provider or supplier that’s subject to survey by Medicare has to comply strict infection control protocols. Those require cohorting of positive or negative COVID patients. There’s a guidance level on surveys for social distancing and things along those lines. But outside of the inpatient setting and outside of the ASC setting, there’s not a licensure or accreditation requirement, in most States anyway, when it comes to medical office space.

Joel Swider: And so even though the guidance is there from CDC and CMS and [Ashe 00:06:25] and the World Health Organization and others, there’s no enforcement mechanism in this setting. So in some ways that’s a good thing because it means flexibility for landlords. In some ways it’s a difficult thing because it means it makes it more difficult to discern a reasonable approach when there’s no requirement.

Joel Swider: The last thing that I’ll say on the legal front is we did some research and found that the majority of States at this point have implemented or are advancing serious discussions around liability shield laws. And those generally protect a business owner from COVID liability so long as they act reasonably and are not negligent or grossly negligent.

Joel Swider: So what I’m hoping that we’ll come away with from today’s discussion is some sense of what is reasonable in this setting so that we can all serve our patients while also obviously avoiding liability.

Joel Swider: So with that as background, the first question that I want to pose to the group is, what are hospitals and other MOB operators actually doing from a facilities’ perspective to manage their medical office space? And maybe Ryan, if you could walk me through from the time somebody drives into the parking lot to receive medical care to the time that they leave what changes in protocols would that patient or visitor encounter?

Ryan Walters: Yeah, and I think my general response to this new normal, I think what we’re finding is if the buildings were professionally managed and following best practices pre-COVID, there’s really been minimal impact. I think there was a lot of unknown upfront of, “Oh no, what else are we going to have to do?” But I think we found our best practices have held true through this.

Ryan Walters: We obviously have more coordination, more PPE and some extra signage, but when a patient comes in, you’ll probably see some tents at some of our MOBs for testing facilities. So you might have to find a different parking spot. And I guess you’re used to. You’ll probably see some signage on the building entrance and maybe some directional signage on certain doors to enter or not enter. Please wear masks, social distance.

Ryan Walters: Often though when you walk into our lobby it’s the same friendly face. They’ll just have a mask on. You’ll probably see furniture spaced out a bit more in our waiting rooms. I think you’ll probably see less people in those waiting rooms. Trying to get patients back to an exam room as quick as possible. And we do have less people in our buildings. So it’s a much more coordinated effort. When vendors need to come onsite our technicians or property managers are meeting them at the front door, escorting them into the facility and getting out as efficient as they can. But other than that, for the most part, I think that’s what you’re going to expect to see.

Joel Swider: And Mark or Julie, I know when we talked earlier, you said there were some jurisdictional related items too, that you having a portfolio for example, Mark, that is in multiple States, you might see some variation in that. Any additional thoughts?

Mark Theine: Yeah, absolutely. Certainly. It’s going to be a customized approach based on the size of the building, location of the building geographically, climate, things like that. I guess even taking a step back it’s amazing that, I read an article this morning on [Axial Self Care 00:10:02], that one year ago today there were about 2000 confirmed cases of COVID and most of which started in China, of course. And there was just a handful in the US.

Mark Theine: So I mean what a ways we’ve come in just one year’s timeframe. And I’m really proud that within our company, we sent out our first communication to our healthcare partners around the country at the end of January of 2020, just about the importance of good hygiene. And if you’re feeling sick staying out of medical office buildings. And then obviously we got into March and pandemic started spreading a little bit faster and the awareness of what was coming at us increased.

Mark Theine: And within our team we formed our own COVID task force at that time. And we developed a 32 page building readiness manual for our property management workers around the country. So we could approach this with a customized and plan that we could implement all around the country.

Mark Theine: We also put together a tenant guide for all of our hospital partners with best practices and whatnot. And it outlined exactly what Ryan just said. All of those [inaudible 00:11:13] COVID crisis that we’re so used to seeing now with the importance of PPE, mask, ingress and egress of the building, and then your point about jurisdictional.

Mark Theine: And that was probably one of the biggest challenges that we addressed early on was about screening within buildings, medical office buildings. As patients were coming in, who was in charge of that screening? Was it the building owner? Was in the hospital system? And in the case of our portfolio, we partnered with the hospital system and entered into a license agreement to allow them to use common area space in a multi-tenant medical office building, or use a parking lot for screening or now the vaccine administration.

Mark Theine: But it definitely varied region by region. And we’ve worked with our revenue management teams across the country to implement those best practices that Ryan was outlining a minute ago.

Ryan Walters: And Mark that’s a good point too on who’s doing it. I think if you were to, I’m going to talk strictly from our real estate perspective. So our property managers and technicians, but really it’s our clinic managers that are in the buildings and the operations team that have taken on a bulk of the changes that need to be implemented. Because they’re there at the front door and taking on the temperature screening and those kinds of things.

Mark Theine: I would just say one additional thing we did this Summer was to partner with Julie and her company in a survey of health care consumers in five of our largest markets across the country.

Mark Theine: And we asked them just about their comfort level of coming back to medical office buildings, again, to your opening comments. They never really closed [inaudible 00:12:55] more people back and the volumes increased. But what would make them more comfortable coming back to medical office buildings?

Mark Theine: And one of the answers that didn’t surprise us, but one of the answers we heard loud and clear was, not just telling us the things that you’re doing in the buildings and you’re wearing PPE and you are cleaning, but physically seeing someone in the lobby, cleaning, cleaning the buildings, cleaning the common areas, elevator buttons, door handles, et cetera.

Mark Theine: So we’ll talk a little bit more about that survey, but yeah, those are the things that we’ve adjusted on our team to be very visible, very transparent in the communication and the efforts that we’re doing within our buildings.

Joel Swider: Yeah. I’d love to jump into that. Julie, how can we communicate to consumers that it’s safe to enter, and in some cases reenter, because a lot of people have put off care, right? So how do we get them comfortable?

Julie Carmichael: It’s a question that really puzzled me and why we started back in July with a survey in Indiana to see what consumers were feeling. I had heard a lot of anecdotal examples of patients not going to the hospital with heart attack symptoms. And I wanted to understand why that was and what it was going to take to get them feeling comfortable.

Julie Carmichael: So the results that we found in Indiana, and then when we did the survey for Docreit, really are similar across the country and we boiled it down to five key points. The first being consumers prefer strongly, 75% prefer to seek services not on a hospital campus. I think that’s important for us to think about from a strategic standpoint, especially as we’re trying bring patients back. If we have off-campus locations where medical office buildings and other facilities that are not on our main campus and we can ease people back into that setting. I think there’s an opportunity.

Julie Carmichael: As Mark mentioned consumers told us, “We want to see what you’re doing.” Show not tell. Just this need to visibly see that precautions are being taken and that we’re taking their safety very seriously. So I think that’s going to continue and will really contribute to getting people to come back.

Julie Carmichael: Consumers also want us to go above and beyond the requirements. Frankly, they look at what the CDC and others have said. And it’s great, but if you can do more than that, we would really prefer you to go further. And then when we’re communicating to patients, the last two points really get communication. One is physicians and nurses and clinical staff are the best way to communicate with patients that it’s safe to come back and what all you’re doing to keep them safe.

Julie Carmichael: We found, surprisingly, hospital CEOs were on the bottom of the list for folks that should be out in front and giving these messages. In fact, consumers told us they’d rather hear from their local legislators than hospital CEOs. Which I thought was very interesting. So think about who you’re putting out in front.

Julie Carmichael: And then the final point is, to the extent you can, one-to-one communication is appreciated. So rather than just putting out broad notices, broad marketing strategies, being able to send that email to your patient, kind of a one-on-one communication that, “Hey, these are the things we’re doing. This is what you’ll see. This is what you’ll experience when you come into the building.” I think consumers really like that knowing what they’re going to face, as Ryan discussed. What’s it going to be like when I come back to a health care facility?

Julie Carmichael: So that’s the study in a nutshell, and we can talk more about it and I’m happy to share if folks want to dive into that outside of today. Reach out and let me know. I think it’s helpful as you’re thinking about real estate strategy and just getting people to come back to your medical office buildings.

Joel Swider: Well, and that’s very interesting, Julie. I think one of the things that we’ve gotten some questions about is related to certifications and using that potentially as a way to say, maybe it’s a communication device, maybe it’s a sort of check the box item. I don’t know, but anybody on the panel have any experience with those sort of outside certifications that have come to the market recently? Is there any validity to those? Are they worthwhile or is your money better spent elsewhere? Any thoughts on that?

Ryan Walters: I can kick it off. We haven’t pursued any specific certifications. I mean, we have our employed infection preventionists and the relationship between that team and our real estate team is the strongest it’s ever been.

Ryan Walters: They are meeting with our janitorial vendors, looking at their scope and cleaning products, making sure they’re appropriate. And if there’s ever an issue they’ll run over to a building and meet the real estate team to look at the issue. Other than that, certification wise, we’ve definitely been doing more test adjust balance reports from certified vendors that are capable of doing those to make sure we have proper air flows.

Ryan Walters: But Mark or Julie, I don’t know if you’re seeing anything else on the certification front.

Mark Theine: I think you described it really well. Yeah, there’s a lot of groups obviously popping up now. Claiming to have the latest and greatest new certification and trying to monetize that.

Mark Theine: But back to Ryan’s initial point. I mean for groups that have already been operating their buildings to high level, we’ve already invested in the platforms to improve the patient and physician experience in the buildings. And what COVID’s really done, and managing through this right now, is improved the focus and communication of the operations teams.

Mark Theine: So to Ryan’s point again, we are communicating more and more frequently and sharing data in real time from our systems about what we’re doing for our work orders, for hours that people are in the building, screenings, tracking patient volumes. And these are systems that we had in place already pre-COVID, but the focus has really been on increased communication transparency around the efforts that we are doing. Both to our hospital partners and then ultimately to their patients.

Julie Carmichael: I would just add that our survey results really showed that consumers listened to the CDC more. The CDC and local health departments. So as these companies that do the building certifications have popped up, it’s really been after we’ve done the survey, but I go back to consumers have certain people that they view as experts. CDC, State Department of Health, your physicians. And then I think I’d spend my efforts making sure that what I’m doing is well communicated and visible and not necessarily putting a stamp on a building from an organization that consumers don’t know anything about.

Joel Swider: Yeah. That makes sense. And I guess we haven’t really gotten into, another question that we get a lot I’ve heard from you all so far today on communication and some of the protocols. Which to my mind don’t cost a lot or don’t have to cost a lot. Are there any capital outlays that have been necessitated in light of COVID that any of you have seen or recommend?

Mark Theine: Yeah, I can jump in and help here. So from a capital outlay perspective, certainly we’ve evaluated our entire portfolio form, mechanical systems, where we can improve, fresh air flow. We haven’t gone in, wholesale made changes to existing facilities. Where there’s new development facilities we can of course pick things as we’re in the projects, now with COVID implications in mind.

Mark Theine: But we haven’t gone back to retrofit an entire mechanical system or anything like that. But where we are investing our money now is in, when we’re doing common area renovations we’re putting in touchless sinks or automated doors. Sometimes elevators that you can have just one call button instead of pressing the button on every floor.

Mark Theine: So we’re looking at that. And then clearly on tenant improvements as we’re renewing leases and offering some capital to freshen up the space. We are looking sometimes at the design flow of how the office section lays out one way in and then a separate exit out. So it’s one way traffic.

Mark Theine: Some practices are considering not having as large a waiting room and taking patients straight back to the exam room and wait there, so that they’re separated. But then there’s other systems that want larger waiting rooms to separate everyone. So it’s customized by my practice there, but where we are investing our money, again, is more on the TI and the remodels as they’re coming up in our portfolio. But we haven’t gone back to wholesale [inaudible 00:22:51] yet.

Ryan Walters: Yeah, very similar opinion as Mark. We have design guidelines for our primary care and our specialty care clinics. So our architects have been revisiting those and having some conversations around some of the things that Mark mentioned.

Ryan Walters: So things we’re looking at are, should we have power and water hookups in our parking lots, or maybe a bigger plot of land? Should we need to use our parking lots to put up tents in the future? Should we have bigger entrance canopies if we have lines going out our front door? The automated door hardware and hands-free faucets for patients that Mark mentioned. What do we do in our exam rooms to increase our telehealth capabilities? Do we have some extra negative pressure exam rooms near a separate entrance? And where should the doctor’s workstations be for those telemedicine visits? Should they be in the clinic or elsewhere? Just some things we’re thinking about.

Joel Swider: Ryan, I want to follow up on one point you made. Talking about preparing the parking lot as another potential site of care. I suppose that’s easier when it’s owned real estate. I mean has that been successful on the tenant side as well and saying, “Hey, landlord, you’ve got to do something here.” Or it’s not really a TI issue as much as a facilities issue and amenity, if you will. Has anyone seen that on the tenant side?

Ryan Walters: Yeah, so we own about half our properties and lease about half. And I was just going to say, we do have tents set up. We are the single occupant in the MOB, which helps. But we’re very thankful to our landlords. It’s really come down to just a transparent conversation. Hey, who are the vendors? Show us some diagrams, how traffic flows going to work? What electrical systems are you going to tap? How are you going to restore it?

Mark Theine: Yeah, similar to me. Again it goes back to that collaboration with our hospital partners and how quickly can we help them set up something in the parking lots. Initially it was testing sites in the parking lots, but most recently in the last week or two, we’ve been having conversations about vaccine administration and drive-thru vaccine sites through larger tents.

Mark Theine: And some of the discussions get interesting and maybe you’ll appreciate this from a legal perspective is, some of those sites we own the buildings be simple, but in others we ground lease them. So the hospital may already own the land and we own the improvements of the building, but in those cases the hospital has decided on their campus to set up the tent and we just need to kind of over-communicate on where are we going to display some of that parking in those cars. Because a few of our leases do have minimum parking requirements in the leases.

Mark Theine: And it just creates some challenges operationally, in patient flow, and then again for our property managers to be able to communicate that to everyone. In the multi-tenant building those tenants that are not hospital tenants, so ground leases being reviewed a little bit more as we’ve set up testing sites and now vaccine locations.

Joel Swider: Yeah. I want to delve a little bit more into this idea of transparency. And Julie, you mentioned this earlier, Mark, you echoed it as well. Can we talk a little bit about how do we serve our customers, whether at patients or, Mark in your case, hospitals maybe by providing more transparent data. Have you seen that play out?

Julie Carmichael: Well, I think in a couple of the practices that I’ve worked with, I’m seeing the providers just be much more communicative. More regular communication, whether that’s newsletters, quick emails. That one office that’s done a great job putting out videos where the provider will talk about what’s the latest protocol in the office. What’s changed since the last time you were in.

Julie Carmichael: I think it’s just an extra attention to communicating things that we think that probably people already know. It’s that mindset of over-communicating. So that’s really what I’ve seen with most of the medical offices that I’ve worked with. I don’t know Mark, Ryan [crosstalk 00:27:49] seen something different.

Mark Theine: We’ve had employees before COVID, which really helped us excel in their customer service to the hospital partners during COVID. A work order management system platform, where we could track and measure and monitor all requests that we’re getting from our partners.

Mark Theine: So we could track how long until a work order is dispatched. How long until it’s completed? One of the most useful tools is at the end of the work order we can get a rating on how well we did. So thumbs up, thumbs sideways, thumbs down just like an Uber. You get a four star, five star Uber rating.

Mark Theine: We get real-time feedback on how well we’re doing on our work orders. And then in that system we can also track janitorial schedules, engineering hour schedules. And so we have all this data and we put together a [inaudible 00:28:40] report to our hospital systems.

Mark Theine: We share with them on a very routine basis all this data about here’s how we’re doing on work orders. Here’s our customer service to the physicians. They’re rating of our work order in our teams and then how quickly we’re responding to them. And then also showing them that we’re thinking about adjusting janitorial hours or engineering hours to take care of the team’s health, but yet also servicing the building. Those communication back and forth has just really gone long way to keep these buildings open and then ultimately keep the providers and patients safe in the buildings.

Joel Swider: Thanks one other, I want to switch gears a little bit, because one topic that we talked about on our prep calls was how taking the COVID response seriously when it comes to property management can actually enhance business. It could be an opportunity. And of course I don’t mean to be light of a very dire situation, but how can we, from a business perspective, enhanced business in our COVID response? Julie, I know you’ve talked about this before a little bit.

Julie Carmichael: it does feel somewhat awkward talking about trying to grow and expand market share in this environment. And at the same time, I think this is the kind of environment where there are opportunities to grow market share.

Julie Carmichael: Things that I think are important are looking at your portfolio. And if you’ve got assets that are not on campus, figuring out how to maybe drive more service there. I think consumers now like convenience, smaller offices, it’s just that big campus setting that I think people are a little bit leery of. So looking at where you’re providing services. If you can put services together in convenient locations and convenient packages so that people can do multiple things in one trip. I think that’s a good opportunity right now.

Julie Carmichael: And then just from a general standpoint, I think as you’re serving your competitive landscape there are a number of people that you’re probably competing with that are so focused on just responding to COVID because they’ve had to be. So if you’re not in that situation, or even if you are maybe pulling out a small group of people who you asked to focus on the future and think about where are the opportunities that we have.

Julie Carmichael: If everyone is thinking about today and no one’s thinking about tomorrow, I find that to be a bit dangerous from a strategic standpoint. So I like the idea of having at least a small team of people that are thinking about the future and where those growth opportunities are, because they are there.

Mark Theine: Yeah, I think that’s one of the trends that we’ve seen. Accelerated over the last year is the shift to the off campus buildings. I mean the reimbursement and technology and all those enhancements were already driving more and more care off campus. The COVID continued to accelerate that. As consumers didn’t want to go to the big box hospital where the COVID patients are being taken care of. They’d rather get their care closer to home in a clean and safe environment.

Mark Theine: So I think Julie’s spot on with her comments about shifting care to the off campus setting there. In fact 72% of new construction starts last year were in off campus buildings.

Mark Theine: And I think that historically healthcare has been very hospital centric and in the future, as Julie just said, it going to be very consumer centric. And it’s going to be more about the patients and their preferences. How to get care in a clean, safe, convenient way is the way to be thinking about healthcare in the future.

Ryan Walters: Which may or may not be in an exam room in a medical office building.

Joel Swider: Yeah. Ryan, could you elaborate on that? Because I think from the hospital perspective, I think, we just heard a lot of people are not wanting to come on campus or they’re not, obviously there are certain conditions where you have to, but for an office visit. Any thought from the hospital perspective in terms of how you’re responding or plan to respond in the year ahead?

Ryan Walters: Yeah. There’s lots of interesting conversations that I’m sure everyone’s asking throughout the industry, but with the care that’s being delivered in a car out in front of an MOB. What does it mean to look at a car as an exam room? What’s telemedicine do? And what’s an exam room look like if it’s in a patient’s home? Lots of interesting questions and conversations around that.

Joel Swider: Well, I’d like to wrap up our discussion with exploring the future horizon and what have we learned? What does this new normal look like? What will we keep and what will we discard? Obviously we can’t see the future. Any thoughts on that? On what we’ve learned and where we go from here.

Ryan Walters: I think, so big questions in my role, we oversee all of our leasing, buying, selling. Most of our office employees are remote today and plan to be through Summer.

Ryan Walters: I don’t know of many medical office buildings that have formally closed, at least not for very long, throughout this process. But we did close a lot of our office buildings. So we foresee a need for much less office space or a different type of office space. Where nobody has a reserved desk or cubicle. And we deploy a reservation system where you can reserve a cubicle or meeting room, depending on the type of work you need to do in the city that you’re currently located.

Ryan Walters: So we’re identifying which caregivers are fully remote moving forward. My VP recently told me I’m one of those. So I’m a guinea pig in this effort. And who needs to be in front of a desk five days per week can be assigned cubicle and who’s in between.

Ryan Walters: And then on the medical office side, it’s what is the impact of telemedicine? Does that allow us to see more patients and postpone the next new building a few years? Because we have some more capacity. Do we need a different type of space for telemedicine? Some of the questions we’re asking,

Julie Carmichael: I think it’s going to be a mix in some ways. I think a lot about the fact that people are pretty quick to forget things. And I wonder what the lasting impact on all of our psyches will be after living through a pandemic. Will it change our behavior forever, or will it change our behavior for a while?

Julie Carmichael: And I think there are probably some things that may change forever. I think telemedicine is something that has worked well in certain instances, but there are a number of practices and specialties. I think about obstetrics as an example, and a lot of women’s health where it’s just not practical to do a lot of that care via telehealth.

Julie Carmichael: So I think, to Ryan’s point, we’re going to have to live in both spaces. We’re going to have to figure out, maybe we can delay some additions that we thought we might need to do some expansions. And I also think it’s going to be interesting to watch what happens on the ambulatory surgery side. With changes to Medicare and other insurance companies being willing to pay more and cover more services in that setting. And providers, I think, starting to feel that the quality is comparable. I think we’re going to see a lot of activity in the ASE space going forward. But it’ll be interesting to see. I wish we knew for sure, but I think we’re all guessing.

Mark Theine: I love the optimistic question about thinking about what’s coming in the future, especially given how challenging this year has been. But the truth of the matter is that we are still in a crisis and there’s still a lot of COVID care being developed.

Mark Theine: And it’s really important for us to remain disciplined in our operations of the facilities today in what this new normal is that we’re talking about. It’s very easy to get COVID fatigue and not wear your mask or start settling into the new normal of your management hours and things like that. Your management tasks, but it’s really important to continue to stay disciplined for the very foreseeable future.

Mark Theine: And then further into the future to answer your question though. I, talking to a CFO yesterday of the hospital system, and one of the comments he made that really resonated with me is that they shifted more of their surgery procedures off campus, the AFCs.

Mark Theine: Again, the same capacity in the hospital system. And those procedures will probably now for a very long time continue to be located in that off campus surgery center. So there’s a lot of opportunities for certain off campus surgery centers, [inaudible 00:38:51] future. And procedures that have shifted away from the campus, off campus will continue to stay there in the future.

Joel Swider: Great. Well, that is the extent of my prepared questions here. Julie, Ryan, Mark, thank you so much for your insight and thank you to our audience for joining us.

Joel Swider: We will be sending out contact information to the extent that anybody has questions that didn’t get answered today and you’d like to continue the conversation. We have our strategy discussion coming up on February 25th, which I think will be an interesting follow-up to this one.

 

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Demonstrating Hospital Community Benefits

Demonstrating Hospital Community Benefits 

Providing charity care and community benefits is important for hospitals because it affects the way they’re viewed in the eyes of the public and is a requirement for property tax exemption and income tax exemption. Increasing we’ve seen pressure at the federal level and in numerous states to challenge hospital tax exemptions. This episode is designed to help hospitals devise innovative ways to demonstrate charity care and community benefits in preparation for and in response to governmental and third-party scrutiny.

Podcast Participants

Joel Swider

Attorney at Hall Render

Kerry McKean Kelly

Vice President of Communications & Member Services, New Jersey Hospital Association

Neil Eicher

Vice President of Government Affairs, New Jersey Hospital Association

John Palmer

Director of Media and Public Relations, Ohio Hospital Association

Joel Swider: Hello and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider, an attorney with Hall Render, the largest healthcare focused law firm in the country. And today we’re going to be discussing hospital community benefits and sharing some ideas for how hospitals can demonstrate the good work they’re doing in the community. I’m excited to have three guests with me today. The first is Kerry McKean. Kelly. Kerry, welcome to the show.

Kerry McKean Kelly: Yeah, thanks Joel. My name’s Kerry. I’m the vice president of communications and member services for the New Jersey Hospital Association. And some of what I do here is take issues like community benefit that we’re talking about today and make sure our external stakeholders hear about it, whether that’s community members or legislators or members of the media.

Joel Swider: Great. Well Kerry, welcome. And our next guest is Neil Eicher. Neil, can you tell us a little about what you do?

Neil Eicher: Sure. So I’m vice president of government relations and policy at the New Jersey Hospital Association. I run the advocacy department both on the state side and the federal side. I’ve been at NJHA for 12 years now. Prior to NJHA I was chief of staff to a local state Senator. So came up from the political route and look forward to the discussion today.

Joel Swider: Great. And last but not least, we have John Palmer. John, welcome.

John Palmer: Hi Joel. Thank you for having me. I’ve been with the Ohio Hospital Association for eight years, working in our advocacy department, focusing primarily on media relations and community outreach initiatives and the community benefit program and initiative has been one of my areas for the last eight years at OHA and I’m happy to be on to talk a little bit more about that and its role in community health.

Joel Swider: Great. Well thank you all for being here and being willing to share your knowledge. We’re talking about demonstrating hospital community benefits. So why is this important? Well, providing charity care and community benefits is important for hospitals for one thing because it affects the way they’re viewed in the eyes of the public. Not only that, but also demonstrating charitable purposes or community benefits is a requirement for tax exemption at the federal level and in almost every state at the state and local levels. We’re talking here about exemption from federal income tax, property tax exemption at the state and local level is a big one as well as exemption from state income tax and sales and use tax. But increasingly we’ve seen, we at Hall Render have seen at the federal level as well as at the state level in numerous States, challenges to hospital property tax and other types of tax exemption.

So today we’ll try to help hospitals come up with some innovative ways to demonstrate levels of charity care and community benefits in order to respond to and hopefully even preempt some of these governmental and third party attacks. So the first question I have, and this is really directed to both, Ohio Hospital Association and New Jersey Hospital Association. Both of you in, in addition to several other state hospital associations have been calculating and publishing a report for several years, which is a community benefits report. Could you tell us a little bit about what the impetus was in putting together that report?

John Palmer: Hi Joel. I think I’ll take this one from OHA’s perspective. Probably about nearly 20 years ago, we were working internally with one of our committees and there was a desire to have a document that really captured the statewide kind of figures and numbers to really look at as a whole, as a state. How are we implementing community benefit. At the time, charity care, the financial assistance services that hospitals have provided was getting growing that was causing some concern about the amount of uninsured Ohioans and what opportunities we had to help address that because it was putting some strain on hospitals. So eventually OHA spearheaded and led a collection process capturing all of our members community benefits, our charity care, Medicare losses, Medicaid losses, community benefit activities, bad debt, kind of compiling that into a report. Instead of creating those parameters, we followed the national Catholic Health Associations guidelines for community benefit reporting.

And those categories that I mentioned come from that national standard there. And so we put together a report and ever since then we’ve been issuing that. It’s taken some different forms over the years, whether it was an online webpage, a printed report, a fact sheet, brochure and any of those things. It took different form to meet the audience needs or to really focus on the story that we wanted to tell.

Joel Swider: Sure. So could you tell me, and I don’t know if the NJHA folks want to weigh in on that, do you have any other impetus and why you decided to put the report together?

Kerry McKean Kelly: Our experience is similar to that that John described, but just speaking very simply, I would say that our goal is to make sure that stakeholders are aware of the depth and breadth of the contributions our hospitals make. It becomes a very good tool in telling that story in your community, but also for use in policy development and advocacy. It’s important that everyone sees not only that data and how impressive that number is when you count it all up across the state, but also the community stories that are behind that data. Hospitals are such important anchors of their communities and I think there can be a tendency for people to take that for granted. But it’s such an important reminder for us to see that the dollars and support reaches into the billions. And that’s not just in delivering healthcare services and jobs, but also those value added programs in their communities.

Joel Swider: That makes sense. And so you’ve talked a little bit about where the data comes from in terms of schedule, age. I guess, could you tell me a little bit about how the reports are set up and what types of metrics are included?

Kerry McKean Kelly: There is a pretty standard reporting structure in these community benefit reports. The categories and definitions are established by the Catholic Health Association and they cover four main areas and they are free and discounted care, community health improvement services, health professions education, and kind of a catchall category called other community benefit programs. So the idea I think is to have any organization across the state, or I’m sorry, across the nation adhering to these standard definitions and categories so we can get a pretty good picture and comparison across the nation. But I would say that with that said, we here at NJHA have had some discussions about whether the standard categories that were developed, I don’t even know how long ago, whether they’re really capturing all of the work that hospitals are doing today in their communities. With so much growing focus on social determinants of health, for example, hospitals are investing in programs like housing and transportation quite apart from traditional healthcare. And we’re not sure that we’re really capturing that in all of these community benefit reports.

Joel Swider: And so let’s drill down a little bit into what these reports show and what the advice is for hospitals. I guess we’ll start with New Jersey. The 2019 New Jersey community benefit report indicated that New Jersey’s nonprofit hospitals contributed 2.83 billion dollars, and that’s billion with a B, in community benefit support within their local communities in 2017 what does that consist of?

Kerry McKean Kelly: The largest chunk of those dollars and New Jersey’s report is in free and discounted care. And that total is 1.9 billion. And that includes charity care for those people without health insurance. And it also includes the shortfalls that hospitals incur when they care for a Medicare and Medicaid beneficiary. Because, of course, we know that both of those programs reimburse hospitals at rates that are less than the actual costs of providing the care. And that total also includes uncollectible patient care costs, which is more commonly called bad debt. It’s basically quite simply care that the hospitals provide, but for which they never recouped payments. New Jersey’s total also includes 247 million in health professions education. That includes graduate medical education and again that’s an area that people might not really think about, but it’s so important for developing the next generation of physicians and other healthcare professionals.

Our total also includes 60 million in community health improvement services, and those are the things that you would normally think about when you hear the term community benefit. So that would include services like health screening, support groups, health classes, fitness classes, those sorts of things. And finally, our other category total $620 million. And that includes a lot of those overlooked areas. One of those important ones that people may not think about are service lines that a hospital may operate at a loss, but they continue to provide that service because they’ve identified a need in the community. Another area that would be included in that are payments in lieu of taxes or other contributions that hospitals make to their host municipalities.

Joel Swider: So for OHA, I’m looking at your report here and the latest OHA report shows a couple of interesting things to me. One of which is that Ohio hospitals provided 7.5 billion dollars in total uncompensated care in 2016 which I assume is the latest year that we have data for and this was up from 4.9 billion in 2013 which was pre expansion of Medicaid eligibility. It seems to me wasn’t one of the stated goals of Medicaid expansion that more people would be covered by insurance and therefore costs to the system would go down as there would be less uncompensated care? If that’s the case, how is it that the total uncompensated care figure has risen about 65% it looks like over that three year period post Medicaid expansion? I don’t know John, if you have any thoughts on that.

John Palmer: Yeah, thanks Joe for bringing that up because you know it’s one of those things as we develop our community benefit reports, another aspect, or another term that’s often affiliated is our total uncompensated care. So when you look at community benefits, you’re looking at your charity care, your community benefit activities, the Medicaid loss, and then any reimbursements from the Federal DSH Program. And then that’s where you get your net community benefit. And then to go a step further to calculate the uncompensated care, you also look at the Medicare losses and then the bad debt that the hospital has incurred. When we report out our data, we have community benefit, but we also report out on uncompensated care. And the situation with Medicaid expansion that came through with the affordable care act, Ohio implemented that in 2014 with covering more Ohioans low income onto the Medicaid program.

And so in that year of 2013 we had a decent amount of uninsured after an expansion happened in 2014 we saw the uninsured population decrease significantly and all of a sudden now you’re shifting that population from uninsured over to government payer. And so you saw that drop in charity care. What happened also in that time is we saw a pretty decent uptick in hospital’s community benefit activities. So there are efforts around research, health education, community health services, subsidized health services to what Kerry was referenced earlier, community building, financial aid and kind contributions. So we saw a huge uptick, about 1.5 billion dollars of that with 2016 data. We saw Medicaid and Medicare losses also increased as well. And so you shifted from one major category because before expansion, charity care did occupy a pretty big allocation of our community benefit.

And so once that decreased then you saw increases in hospitals making investments in their community benefit activities. But they were also taking some greater losses when it came to the Medicaid and Medicare program during that time. We will have 2017 data out here. We’re kind of putting some final touches on our 2019 report, which focuses on 2017 data that we would have out before the end of the year. And I will say that we are seeing increases in all those areas of charity care, community benefit activities as well as Medicaid and Medicare losses. So it continues to be kind of volatile when it comes to these numbers reporting and trying to get some trend analysis going on there too. But I think it’s responsive to the communities that we’re seeing and a lot of utilization of services or a lack of utilization of services around in some areas. So I think we’ll continue to see some of those fluctuations. [crosstalk 00:14:59]

Joel Swider: Well John, that’s interesting. And I know you said the report isn’t out yet, but have you, just in your preliminary look at the 2017 data, have you seen those trends continuing?

John Palmer: Yeah, we’re seeing increases in charity care, community benefit activities, as well as Medicaid and Medicare losses are gone up as well. Bad debt has increased a little bit, but overall we’re seeing, we’ll be reporting out a total community benefit increase from 2016 data and then a total uncompensated care increased as well. For the end of the year.

Joel Swider: So it sounds like, as I’m listening to you and reading these reports, there are a couple of elements. It seems to this concept of community benefit or contributions generally to the community. There’s the uncompensated or charity care side. And then there’s also this concept of community building or outreach activities. According to both of your reports, hospitals are engaging really in both of these activities. Could you talk about what’s driving this kind of multi pronged approach?

Kerry McKean Kelly: I think it’s really part of the growing recognition that what happens in your home and in your community has a greater influence on your health than what happens within the four walls of the hospital. Hospitals have always made these commitments and community benefit, but I think it’s becoming much more of a strategic approach under healthcare reform and the focus on population health. Hospital investments and healthy communities simply make good sense for improved patient outcomes, lower healthcare costs, and a much more sustainable healthcare delivery system.

Joel Swider: Well, the numbers that are cited in these reports seem to indicate that not only are your member hospitals providing huge amounts of charity care, but the amount of charity care and community benefits and community development funds has actually been increasing steadily. I want to switch gears and start looking from benefits to costs, because there was a report that was put out in September of this year, September, 2019 by an economics professor at Ball State University here in Indiana, and his report asserted that the increasing cost of healthcare is largely attributable to what he calls monopolization of the not for profit healthcare sector. In other words, nonprofit health systems, which by the way comprise over half of the hospitals in the United States are acute care hospitals with the remaining 44% split fairly evenly between for profit and governmental. These nonprofits have grown in size and in market concentration by purchasing and aligning with independent hospitals to such an extent that they have the ability to unilaterally push prices up in a given market, at least that’s the argument.

Joel Swider: And while the data that professor Hicks used to support his conclusions was largely correlational, I mean in my eyes it did make for some splashy headlines here in Indiana. It also made some national trade publications as well. And his proposed solution was more taxes on revenue, more taxes on real estate. And more taxes on asset holdings by these not-for-profit healthcare providers. I think if you peel back the onion on some of these arguments, at the root of it is a perception that hospitals, particularly nonprofit hospitals are just not providing enough charity care to justify their exemptions. And it seems to me and part of the reason why I am excited to have you on the show is that what OHA and NJHA and other hospital associations are doing is really creating a snapshot of what good that these hospitals truly do in our communities. How do you, OHA, NJHA, respond to these types of challenges and how do you advise your member hospitals to respond?

John Palmer: Well, this is John. I would just comment that, and in fact that yes, charity care has gone down just in response to this great achievement that we’ve had with being able to offer coverage options to many Ohioans that wouldn’t be eligible to if it wasn’t under the affordable care act with Medicaid expansion. The affordable care act was a significant piece of legislation. It is a law of the land. There’s been attempts to repeal it and replace it and I think there’s always going to be efforts. We should always be focused on improving and making improvements and reforms appropriately to build upon successes and look at impacts because the ACA was significant, but they still have some flaws and areas that needed to be addressed. One of those in particular was Medicaid expansion was offered in response to a cut and a reduction that hospitals were going to take with our supplemental programs through the DSH initiative.

John Palmer: And that’s forthcoming as far as what the latest reports are out of Washington is that those cuts are going to be coming to as well. And so even though it might’ve seemed like the affordable care act handed hospitals, providers, a lot of resources at the same time, it came at a cost to kind of balance things out. I think on top of that, you’re seeing hospitals and healthcare beyond what is happening with these healthcare reforms and healthcare laws. Hospitals continuing to make significant contributions with community benefit activities. When you saw when expansion was implemented, charity care dropped, but we saw an increase in community benefit activities. Hospitals making strong efforts and making investments in their communities, looking at clinics, establishing community health initiatives through clinics, looking at population health issues like diabetes and obesity and smoking, some of these areas that really have an impact in helping to turn around a community’s health.

John Palmer: So I think overall we’re going to continue to focus on our community benefit programming because numbers are important. Numbers tell a pretty big story, but it really needs to have a narrative. It really needs to start doing snapshots. And we’re seeing a lot of our hospitals make that effort in their reporting of community benefits and really telling that story about those programs that they’ve initiated, those partnerships that they’ve established to really advance healthcare and wellness in the community. So I think you’ll see that moving forward [crosstalk 00:22:10] your report.

Joel Swider: Neil, anything you missed?

Neil Eicher: Sure I’ll just… John outlined it very well. It’s easy to look at the expansion of Medicaid and the reforms in the ACA in a vacuum and not understand that hospitals were significant contributors financially and still are, still after the expansion. But it was something that we had supported as an industry nationwide because we recognize the financial and the healthcare quality benefits of providing insurance to people ahead of time so that they can access the care, hopefully not even in the hospital and not getting to that point. So it’s important to remember that hospitals were a partner in actually funding a lot of these reforms. And the ACA doesn’t get talked a lot about, but the way that they’ve changed the value based programs and how the federal government is now reimbursing for outcomes instead of actual procedures and services in a way.

Neil Eicher: And a fee for service model that we were all used to. And it’s really driven the changes that John alluded to about providing more care in the community, A, because it’s the right thing to do and it’s part of our mission. But B, as payment models change hospitals have to adjust and recognize that they are going to benefit from keeping patients healthy and out of the hospitals. And then getting to professor Hick’s point, every state is different. I can speak for New Jersey. About 10 years ago we had a significant hospital closures because a lot of these community hospitals could not keep up with the growing uninsured and charity care and other issues that they were facing. And so what we’ve seen is a consolidation has actually saved a lot of hospitals in New Jersey and then instead of hospitals closing, they’re getting acquired or working on partnerships with larger systems.

And this has created efficiencies in technology, investment of capital, bulk purchasing, better coordinated care throughout the community. It’s not just nonprofit hospitals getting with other nonprofit hospitals, they’re acquiring urgent care centers, home care agencies, nursing homes, and recognizing that helping the patient through the continuum of care makes the most sense for the community. Just the last thing I’ll add is that I think, again, taking this out of the vacuum at one issue at a time, recognizing the economic benefits that hospitals provide to the state and to its local community through individual income taxes through sales and use taxes through other taxes that hospitals pay. Sometimes it gets lost in a discussion that there’s this assumption that as nonprofits we pay no taxes, which is absolutely false.

So we contribute greatly to the economy. I think that needs to be seen. And it was mentioned a couple of times about a snapshot and we talk about this all the time is how can we tell the story and how can we help each hospital tell its story and showing the community involvement and having it relate, and not just be numbers, but recognizing that hospitals here are safety nets for those who absolutely need us. We’re telling our story and why we’re important and why we take our missions very, very seriously.

Joel Swider: Sure, well and continuing in that theme of telling the story. I believe it was commissioned by the American Hospital Association, but in May 2019, put out two reports analyzing community benefits in tax exempt hospitals, and they compared those benefits to the forgone income tax revenues that the government loses by nature of granting exemption to these hospitals. In the reports they looked at tax returns, forms 990 from tax exempt hospitals and they also looked at CMS cost report data and they found some interesting things. One was the amount of forgone federal income tax revenue due to the tax exempt status of us nonprofit general hospitals in 2016 was $9 billion in the aggregate. That’s a lot of money, but the amount of community benefit provided by these hospitals the same year was $95 billion, so that’s about 11 times more than the foregone revenues.

Another finding I thought was interesting is that almost $44 billion of community benefits that were provided by these hospitals came from financial assistance, unreimbursed Medicaid and other unreimbursed costs from means tested government programs. So these programs really are not filling the gaps. It’s the hospitals themselves, at least it appears to me that these hospitals are really being forced to fill those gaps. So to me these numbers are pretty compelling evidence of the value add that nonprofit and tax exempt hospitals provide. Is this consistent, and John, I guess I’ll ask you specifically at OHA, is this consistent with what you found in Ohio and how do you make sure that state and local officials are aware of these, the good things that these hospitals are doing?

John Palmer: Yeah, I think that was an important study and that one aspect that you pointed out about $44 billion of community benefits from financial assistance and un-reimbursed Medicaid and those are important factors. Charity care is always the focal point and always that go to historically. But I think as we’re coming into a new era of healthcare delivery. Areas around the community benefit programs, those are the stories that I think when you go into those individual communities, that’s where you really see that work come to light. Particularly when you look at subsidized healthcare services, emergency and trauma services, these are 24/7 operations that have a lot of requirements for accreditation, recognition and staffing and equipment and training and outpatient services, behavioral health services under this subsidized healthcare.

A lot of these don’t get at cost for Medicaid and Medicare, but hospitals are providing a lot of that care through different delivery channels. And so I think that’s an important factor there. When you look at this kind of tax exempt and looking at charity care, you really need to look at that greater picture of the total community benefit because there’s a lot of elements in there where you would go into respective communities and talk to the local mayor, city council members, the principal at the local school, any other social services. And you’ll start hearing that story of how the hospital is working to make some of those improvements. The opioid crisis has hit a lot of States and has hit our country significantly and Ohio is one of them. And I can tell you that has had a detrimental impact on a lot of communities and our state. But hospitals are working to try to turn that around and get those numbers to where they need to be. So I think you’ll see a lot more of that spelled out in these reports moving forward.

Joel Swider: We’ll end with this question. Senator Chuck Grassley, chair of the Senate finance committee, sent a letter in October 2019, to UVA Health System about its collections practices being too aggressive and also about the high costs of medical bills in general. And I personally, I’m guessing that we’re going to see some legislative and or administrative posturing on this issue in the near future. Question to both, what are your legislative priorities in the coming year or so regarding hospital exemptions and community benefits?

Neil Eicher: Sure. So a comment from the federal side and a comment from the state side on the federal side, not directly relating to exemptions, but we do see a fight on surprise out of network medical bills. And it’s comments like the senator’s and others that are looking to create a dispute resolution system or a cap on what hospitals and doctors can receive as far as out-of-network payments, which will significantly reduce payments to providers for in-network services. So I think there are multiple legislative initiatives afoot to try to address this and of course looking at things through a vacuum, not completely understanding how costs get calculated. I think that’s pretty much our next biggest threat on the federal level.

On the state side, directly related to your question, Joel, is that we’ve been fighting in New Jersey for over three years for a legislative solution from a court case back in 2015 with one of our nonprofit hospitals who had been in a battle with its town over its nonprofit property tax exemption, which our law currently allows for, and I assume most, if not all States also allow for, but the judge made a decision in tax court, not superior court, that the hospital should be paying property taxes.

We obviously disagreed with this court opinion, but since then had feared that our towns would start coming after hospitals, nonprofit hospitals, and trying to subject them to property taxes. We have 59 nonprofit hospitals in the state. 71 total acute care of the 59 over 40, four, zero, had been engaged in litigation with their towns over their property tax exemption. We’ve had about 12 or 14 have settled with their towns for a period of three to five years with a payment in lieu of taxes in order to not be put on the tax rolls. But we have been pushing strongly for a legislative solution so that we’re not wasting resources and spending money just going after protecting our property tax exemption and paying lawyers and legal fees to defend it. Instead, the money would be best served putting it back into the care that we deliver to the community.

So our legislative solution generally is to, again codify more clearly in statute our property tax exemption. But recognizing that nonprofit hospitals have changed over the last few decades, recognizing that hospitals have and do utilize municipal resources like fire, ambulance, emergency services, et cetera, that we would pay a community contribution fee to our local town. And for us, we came up with a number of $2.50 per bed per day, the nonprofit hospital with calculate, make it publicly available, what that number is and then on a quarterly basis make that payment directly to the municipalities. Then in exchange, they cannot come after us for property taxes the way that they’re doing now. It’s not the ideal solution, it’s about $20 million statewide that we are voluntarily raising our hands and saying that we want to contribute, but it beats having to go through the legal process and having to justify why we deserve our property tax exemption.

And so this is, NJHA’s number one priority to try to solve over the next couple of years. It’s been very difficult because as you can imagine, each town wants to maximize how much money they can get out of the hospital industry. And unfortunately in some instances it has created bad blood between the towns and the hospitals who originally had a good relationship. And it’s also making hospitals kind of fill the budget gaps that municipalities are facing, and instead seeing it as a legitimate healthcare or community contribution, they’re looking at us for dollars to fill their budget gaps. And that is completely out of the intent of what the hospital’s mission is to the community. And as we were talking about today, the economic benefits and community benefits that we provide.

And that’s why the community benefits report is so important because it really drives that narrative so that the legislature, the governor’s office, the policymakers understand that there is a value in having this property tax exemption and having a hospital in the community and all of the resources and all of the contributions they provide, not to just the local municipality, but the surrounding area. So that’s a big issue for NJHA and we’re hoping to get some legislative solution soon.

Joel Swider: So Neil, you and I talked about this issue in the past. I think a lot of us around the country really are looking at New Jersey just because of the sort of public nature of the Morristown case and the resulting posturing and are you any closer do you think to a legislative fix at this point than you were a couple of years ago?

Neil Eicher: We are, and again, thanks to the good work of this community contribution report or community benefits report, we did a good job at laying the groundwork and educating policy makers. But just like in every state there’s local politics you have to deal with and when you’re faced in a state with municipalities facing budget shortfalls and mayors being very influential, you always hit these local roadblocks. And for us, we got the leadership and our legislature and the leadership in the governor’s office fully on board. It’s just hammering out a few details for a couple of local issues that we have to try to navigate through. So hopefully we can break that log jam and get it done quickly.

Joel Swider: And John, what about you? What are your legislative priorities this coming year?

John Palmer: Well, it’s never a dull moment. I mean, legislative issues are abundant. We have a new governor that just is rounding out his first year administration, but we’ll be pressing forward. I think the big one is the price transparency efforts that have happened at the federal level. But there’s also been a lot of activity here in Ohio around that. Consumers are looking for health care information and trying to make the best decisions for them and their families. And so we need to be working on that collectively payers, providers, policy makers to find a solution that’s going to meet those consumer needs.

So we’ll continue to focus on that. As far as community benefit for 2020 we’re going to be incorporating some more repositories on our own respective website of our hospitals, and really doing a showcase and featurettes of what some of those community benefit activities look like around the state. So we’ll be deploying that probably second quarter going into hospital week in May 2020, to really kind of hallmark what hospitals are doing in their communities. So we’re going to be focusing on that kind of report for 2020 and really kind of leveraging that with policy makers and community leaders to really tell that that story more effectively.

Joel Swider: Great. Well thank you all for being here, John. I guess I’ll for OHA, how can our listeners learn more about either the community benefits reports or becoming a member of OHA, who can they reach out to you or look on your website?

John Palmer: Yeah, we’re happy to take any inquiries or any questions. Feel free to reach out to me. Our website is www.ohiohospitals.org and we have a webpage there with a community benefit and our contact information is also there under staff directory. And we’re happy to take any questions or help with any efforts that might be going on out there.

Joel Swider: Great. And Neil, what about for New Jersey?

Neil Eicher: Yeah, NJHA.com and again we have a public resources available and Kerry manages that and of course you’ll have our staff directory, so if anyone has any questions about legislative stuff, please feel free to reach out to me or to Kerry on any community benefits related issues.

Joel Swider: Well Kerry, Neil, John, thank you all for joining me and thanks to our audience for listening today. If you liked this podcast, please subscribe and leave feedback for us using your Apple or Android device. If you’re interested in more content on Healthcare Real Estate, we also publish a newsletter called the Healthcare Real Estate Advisor. And to be added to the list, just send an email to me at jswider@hallrender.com.

How Can Hospitals Better Protect Their Property Tax Exemptions? With Mark Adams (Webinar)

How Can Hospitals Better Protect Their Property Tax Exemptions

Hospital property tax exemptions are increasingly at risk. We discuss which hospitals could be in the crosshairs next and how nonprofit hospitals can protect themselves.

Podcast Participants

Joel Swider

Attorney with Hall Render.

Mark Adams

Attorney with Hall Render.

-Transcript Coming Soon-

Leveraging Opportunity Zones and Other Health Care Financing Tools with Jerimi Ullom and Joel Swider (Webinar)

Leveraging Opportunity Zones and Other Health Care Financing Tools with Jerimi Ullom and Joel Swider (Webinar)

Do you have a hospital development project that you would love to get done but just can’t seem to find the money? Wondering if your health system can benefit from the Opportunity Zones program? Join a health care finance attorney and a health care real estate attorney to hear about some unique and innovative ways to get your project funded.

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Podcast Participants

Joel Swider

Attorney with Hall Render

Jerimi Ullom

Attorney with Hall Render

Joel Swider: Welcome to the Health Care Real Estate Advisor Podcast. I’m Joel Swider, a healthcare real estate attorney with Hall Render, and for today’s episode we’re going to listen in on a webinar put on by my colleague Jerimi Ullom and I, which aired in September 2019, on Opportunity Zones and other healthcare financing tools.

Jerimi Ullom:   Thanks Joel, we want to first of all today thank the Indiana, Michigan and Ohio Hospital Associations for having us, and we look forward to talking with everyone.

Joel Swider:     So there’s been a lot of buzz about so-called qualified Opportunity Zones, but many of the hospitals that we work with haven’t focused a lot of attention on how they can benefit from this program, at least not to date. So in today’s webinar we’re going to answer at a high level three questions that frequently arise in the healthcare context when it comes to Opportunity Zones and the financing of hospital projects more generally.

Joel Swider:     First we’ll look at what are opportunities zones, how do they work, and how can a both for-profit and nonprofit providers benefit? Second I think we’re going to find that the Opportunity Zone program has a relatively narrow fact set where it can be best utilized as a financing tool. So we’re also going to look at what other tools and incentives are available to hospitals to fund new development projects and to drive complimentary development within their markets.

Joel Swider:     Finally, we’ll look at some concrete action items surrounding the next steps for hospitals who are looking at how to get their projects off the ground. Today’s session is designed as kind of a lunch and learn. We should go about 30 minutes, but feel free to type in any questions in the chat box or email us offline we’re happy to make ourselves available to answer any more in the leads questions that you may have.

Joel Swider:     So what are Opportunity Zones? Opportunity Zones were conceived by the Tax Cuts and Jobs Act of 2017 the TCJA. They were designed as a way to spur investment in distressed communities by providing tax incentives for taxpayers who invest capital gains in certain geographic regions. As authorized under the TCJA, state governors were the ones who originally designated these zones, over 8,700 of them and the IRS then later approved those. They’re in all 50 states, the District of Columbia as well as five US territories, and this slide shows just an overview of where the Opportunity Zones can be found.

Joel Swider:     At least this is a view of the continental US and there is an official government map, which we have a link to that on our website where you can zoom in, there’s third party maps as well. You can zoom in and find the area where your hospital or health system is located. And you can tell just from looking at this map at a high level that there are a lot of zones located in and around large cities, but they’re also in a lot of rural areas, especially if you look out West. So because it’s up to state governors to designate these zones, the state had some latitude as to where they’re located. So you might be interested to find whether you’re in one or near one.

Joel Swider:     So how do Opportunity Zones work? So I’m going to go through this slide and the next at kind of a high level, and I’ve used some numbers in here just as an example, the dates as well, just as an example, so that you can see how this might work in practice. But I’ll go through this just briefly so that you can see whether or not you have a situation that might actually fit into the Opportunity Zone program or not.

Joel Swider:     So to start with, you’ll have the sale of tangible property and a gain that’s been realized from that sale. So that’s work I’m calling that investment number one because that’s from some old investment. Now some hospitals buy and sell property more frequently than others. And we’ll get into how you might partner with a developer or other capital partner who might have more gains that they can deploy. So yeah, these dates here other than the timeframes are just for example purposes. But one date that’s important is within 180 days of the sale of that initial property, you must invest that gain into a qualified Opportunity Fund. So that could be all or a portion of that original gain. And I’m calling that investment number two.

Joel Swider:     So that’s a separate investment and you’ll see in a minute that it’s treated slightly differently. Within two and a half years of that initial investment, investment number two, the Opportunity Fund has to purchase Opportunity Zone property and that includes real estate businesses, business assets, etc. And they must improve it by at least the value of the purchase price. So this fund is essentially a vehicle, an investment vehicle, it could be a partnership, a multi-member LLC tax as a partnership or it could be a corporation. But importantly it has to invest at least 90% of its holdings in one or more Opportunity Zones.

Joel Swider:     So now we’ve got the gains from the sale of our initial property, invested it into the Opportunity Fund, we’ve put that money to work and then after five years in the fund, you will get a 10% increase in basis on the initial gain. So going back to that initial amount that you invested from the first gain, you will get a basis step up of 10% essentially that amount is the amount the taxable gain goes down by 10%. Then if you hold that investment for another two years, in year seven you will get an additional 5% increase in basis or another step up on that gain from the initial investment, investment number one.

Joel Swider:     Again, there’s no gain recognized either in year five or year seven, you’re still continuing to defer those gains. Then in 12.31.2026 that is a hard date. There is a mandatory deferred gain recognition on that original capital gain from investment number one. So that and so because of the timeframes here, I’ll mention, if you want to get the full 15% basis step up on that deferred gain, you need to really invest by 12.31.2019. Now you can still invest later and qualify for the 10% basis step up if you hold it for five years. But obviously you could no longer hold it for seven years because that 12.31.2026 drop dead date.

Joel Swider:     Then as to investment two, so going back to our Opportunity Zone investment, if you hold that investment for 10 years total, then any gain from that sale of a second investment is completely erased. You get a basis step up to fair market value. So as you’ll see, I think if you can fit into it, it’s a great program, and as I kind of talked about on the previous slides you can get temporary deferral of gains, you get a step up in basis as to those gains, and you can get a permanent exclusion on taxable gains on the second investment. So it can be a good program if you qualify.

Joel Swider:     Now what happens if you’re tax exempt, you say, “Look, I, don’t have any taxable gains. I am charitable, I’m nonprofit and tax exempt.” Well how can this work for you? And so I think there’s still are some ways that you could leverage the Opportunity Zone program, one of which is, especially for hospitals that are located in the Opportunity Zone or near the border. And there’s some specific rules that the IRS put out earlier this year with respect to those types of properties that span, that are partially in the zone, partially not, which we can again talk about kind of offline if you have questions about that.

Joel Swider:     But if you’re on or near the zone, you could partner with a capital or a development partner who is able to take advantage of the tax benefits and that could result in a lower cost of capital to you as a provider for the real estate or for other development projects.

Joel Swider:     Another way that we’ve seen this work is that hospitals can attract for-profit investors to improve social determinants of health in the community. So we’ve seen a lot of focus in recent years with our clients and other hospitals where they’re looking at non traditional healthcare investments it’s really within their charitable purpose, but what they’re doing is they’re investing in affordable housing, they’re putting grocery stores into sort of a food desert area, and they’re making nontraditional healthcare investments that really help improve the population health in the community as a whole. And by so doing achieve their mission. So this is another way, and we’ll get to an example of this in just a second of how you might partner with a for-profit to provide some of those services.

Joel Swider:     Another thing to think about when it comes to a tax exempt provider is that a rising tide floats all boats. So what kinds of investments could you make that are within your charitable purpose within that community where the longterm value might actually end up not as a direct result but indirectly helping others who would be willing to invest in that community. So for example, a hospital could pledge community improvements in order to attract for-profit investors to the community, thereby improving social determinants and population health more broadly.

Joel Swider:     So just we have three quick examples here kind of straightening what this can look like and I’ve got links to the … If you want to find out more about each of these, I’ve not used the provider’s names but you can look them up. There’s an academic medical center on the East Coast, which collaborated with a for-profit pharmacy operator to open a new pharmacy and wellness store near the hospital’s campus.

Joel Swider:     The store offers a variety of health services, daily living products and health food options, and it also provides a health clinic that’s staffed by nurse practitioners. So this is again in coordination with the hospital. And so this actually came out a couple of years before the Opportunity Zone program, but when we were looking at this we thought, wow, could we recreate this today and take advantage of the Opportunity Zone program? I think you certainly could.

Joel Swider:     And so for this example the for-profit pharmacy operator could defer, reduce their capital gains by investing in the zone and the academic medical center could attract additional capital and development partners, which they have that are able to utilize the program. So again, kind of a win-win for both parties.

Joel Swider:     Another example here, this is in the Midwest, a large nonprofit Midwest health system partnered with a community development financial institution to help mobilize loan and grant funding to revitalize under invested communities this was in greater [inaudible 00:11:53] area. The goals of that partnership included supporting and trusting social determinants of health, job training opportunities, employment skills, education and food security. And I’ve got a picture here of a grocery store that they have built in a food desert area.

Joel Swider:     The amount of this investment was about $45 million. And again here we see partnering with investors and asset managers that are looking who have capital gains exposure, they’re looking for social impact investment opportunities and both the investors in the health system can benefit in these types of arrangements.

Joel Swider:     So one other example that we’re aware of is a large healthcare organization with a national footprint it’s a nonprofit integrated health system, which created an investment fund that committed up to $200 million to target housing stability, homelessness, and other community needs. So they’re approaching it again from a little bit different angle with the goal of preventing displacement of homelessness or homelessness of low to middle income households in developing communities.

Joel Swider:     They’re also using it to promote access to supportive housing and helping to make homes more affordable, they’re looking at environmental impact as well. And the tax savings here again presents opportunities for those for-profit investors and it also improves the quality of housing and improves the overall population health in the community, which is important to the hospital.

Joel Swider:     So I guess as we’ve seen in this first portion of the presentation, there really can be substantial savings and investing in Opportunity Zones if you’re either a tax payer like a for-profit health system, but what about if you don’t have, you can’t partner, the timing is wrong, what other options exist out there particularly for nonprofit providers to take advantage of those, Jerimi?

Jerimi Ullom:   Sure. Thanks Joel. Appreciate it. Yeah, so beyond Opportunity Zones, I mean we’ve dealt for years with various economic development incentives and various models to get projects completed and get projects financed. So we thought it appropriate to maybe look at a few of those, this is not an exhaustive survey, but we’ll highlight a few things that we see in the marketplace, some of which had been around a long time and some of which are relatively new models.

Jerimi Ullom:   And the first thought is that there’s really been a change, I think in the last decade when folks think of healthcare as economic development, the conventional wisdom, and I think if you go back, you can find white papers and journal articles and the like was that healthcare development would simply follow population. And so unlike manufacturing or technology or these other industries, there really was no reason to incentivize healthcare development in a given community. The healthcare providers would simply follow behind the rooftops and want to locate near them.

Jerimi Ullom:   I think we’ve seen a change in that because what we’ve seen is that healthcare can be a catalyst to an entire community. It can almost function like an anchor tenant does for a retail area, if you will. Oftentimes healthcare providers are the first development in a new area. We’ve also seen an increase in kind of competition for healthcare facilities for decades and decades, if a new manufacturing plant was being built, you would have multiple states vying for it to come to their state. And healthcare was seen as not really in the same vein. We weren’t exactly competing Wisconsin versus Alabama to see where we build our new hospital.

Jerimi Ullom:   But at the micro level location is a bit fungible whether we are in suburb A or suburb B when they buddy each other can have a big impact on the project as a whole so we’ll look at that. And then obviously I think one thing that folks have always agreed on is that having quality providers in your community is important in attracting other economic development. Much like having quality education in a community. You want to make your city, your town a place where folks want to live.

Jerimi Ullom:   And before we leave this slide, I think one other objection that has been proffered throughout the years particularly with respect to nonprofit providers is well these guys don’t pay property tax. Why would we ever want to provide any incentives or whatnot to attract them to our community? Part of that came out of this notion that property taxes were generally the tool available to local governments to provide economic development incentives. And part of it came from this notion of viewing it, I think a little too narrowly, so we’ll get to that.

Jerimi Ullom:   But if we look first if we have a situation where maybe a healthcare development is really the catalyst in an area or an anchor tenant, if you will this slide, this is a live project, it’s under construction right now, but we’ve been through several variations of a very similar project. And in this instance what happened is the health system acquired roughly 70 acres, right? They were going to develop 10 or 12 of the acres represented by the blue circle, but they were going to put in the infrastructure and the utilities and the other things necessary for that entire area to develop. They wanted to play a role on the development of the full 70 acres. They wanted to control maybe how it was developed and what those ancillary uses were.

Jerimi Ullom:   So the healthcare system was kind of the initial catalyst, they were often responsible for putting in a lot of the infrastructure but that would lead to additional development. And what we’ve been able to successfully do in many of these instances is negotiate incentives with the local county, local city, whereby the TIF revenue, the tax increment revenue, which I’ll explain shortly generated by these future additional uses, would help offset those initial investments by the healthcare system.

Jerimi Ullom:   At a micro level location is fungible. This is a map I pulled up of the St. Louis, Missouri metropolitan area, not because we have a particular project here, but because I knew St. Louis is comprised of a gazillion municipalities. And if you look at this map, you see all of these small cities and towns that make up the metro area, if you’re a healthcare system looking to locate in a metropolitan area like this whether you locate in one hamlet or village or suburb or the other might not be that critical. We’ve had lots of projects where our clients have looked at multiple sites all within a very close proximity, but all potentially within a different jurisdiction, some might be in an unincorporated area of the county, others might be in the incorporated limits of the city or the next suburb or city over.

Jerimi Ullom:   So oftentimes without being overly harsh or playing hardball with all these communities, but you may well find a location or a community that is much more welcoming and willing to provide a lot more in the way of incentives because they want your project, they want it to be the catalyst in their community. Healthcare projects often come with a number of high wage jobs as states and communities around the country I think there’s a general shift from property tax reliance to income tax. I think that the location of the jobs rather than being on the tax rolls becomes much, much more important.

Joel Swider:     And Jerimi, before you go on, I think one thing I’d add there too, I think I mentioned with respect to Opportunity Zones that a lot of times a hospital is looking to expand its existing footprint, but especially if you’re going into new markets, like you said-

Jerimi Ullom:   sure.

Joel Swider:     It may not matter if it’s a couple blocks away from this side or the other and one may be in a zone one not.

Jerimi Ullom:   And we’ve had systems we’re going to build an orthopedic hospital, we’re going to build an ancillary center, or an ambulatory surgery center, and it needs to be on the Northwest side of the city, right? That could be in any one of two or three jurisdictions. So I mentioned TIF before, real briefly we’ll overview because this is one particularly around the Midwest that’s used very, very frequently. TIF stands for Tax Increment Financing, and it is as it sounds, a structure where we capture the incremental taxes generated by a development or a project and we can capture those funds and use them to help support that project or that development.

Jerimi Ullom:   Oftentimes the current property tax value is kind of locked in as the base assessed value and any amounts beyond that become increment. It’s a little easier to think about when you view it in graphically here, if we go from left to right along the time continuum and then from South to North is the appraised value. You can see when we create the TIF area, we set the baseline of property values. The taxes associated with that baseline continue to flow where they were flowing before to the schools, to the libraries, to the city, to the county, to all of the taxing districts.

Jerimi Ullom:   But the lighter blue triangle over time, that’s the tax increment, because what we’ve done at creation is we have built a new project, or we’ve attracted additional investment to the area that’s driven up the assessed value and therefore is generating more property taxes. That increment is captured and that increment can be used to finance or to pay for portions of the development in the first instance.

Jerimi Ullom:   So if we go back to couple slides that go to the map where the hospital is the anchor tenant that hospital is investing in the infrastructure in the area, but they intend to recoup that investment from future tax increment over time. So if they spend $5 million putting in roads and drainage and utilities, the arrangement with the town will provide that the future tax increment generated in the area will come back to the hospital as a way to recoup that investment.

Jerimi Ullom:   And then of course to the far right once that TIF area ends, determined by state law, but typically 20, 25 years in most states, then obviously all of that increased value is just in the general tax base. So the big win for the city is this is increment we wouldn’t otherwise have, so we’re not giving up any of our base and at some point in time we’re going to have the value of all of it after this TIF area has run its course.

Jerimi Ullom:   Again graphically kind of how it works in practice, you could see where the new development if you will in the graphic generates revenue that can be spent in the area. Most state laws restrict how that money can be spent, it has to be spent either in or connected to or in some states on projects that benefit the area, the city can’t simply capture TIF revenue and go off and do something wholly unrelated with it.

Jerimi Ullom:   This map just gives you a sense for how widespread the use of TIF financing and tax increment as an incentive is. If you look particularly we’ve got Indiana, Ohio, and Michigan associations on the line, and you guys are squarely in the upper echelon of TIF usage. We’re resident in Indianapolis I know there are literally thousands of TIF districts in the state of Indiana, and you can see kind of around the Midwest is a home to it. California, Texas also show up as being pretty significant users.

Jerimi Ullom:  And the overview here is that there’s been a shift over the last decade of healthcare from just something that follows population to really being an economic driver. And if you think about the modern healthcare campus, you can see that readily, all the ancillary for-profit development, all the hotels, longterm care, medical office buildings, et cetera, that are on the tax rolls that generate additional jobs that bring additional people to the area. That economic development story is usually a pretty easy one to put together.

Jerimi Ullom:  Two more thoughts here. Another phrase you might hear a lot about when you’re looking at projects and project finance and economic development is P3, public private partnerships. I say here, it could be P3, it could be four, five, six, seven. There’s no magic to P3. Okay? I hate to burst all the consultants bubble, but there’s no magic around this phrase.

Jerimi Ullom:  All a P3 project is, is multiple parties coming together to get something done. And typically those come from the public space in terms of government, you might have private for-profit, nonprofit, you might have all the above. And each of them often have different tools they can bring. They have different access to capital, you might have a city that owned some land that they want to contribute to a project. And so, a P3 project is really nothing more than bringing together a group and seeing what each of them can offer to the project, what risks they’re willing to take in the project to collaborate and get the thing done. I wish it were sexier than that, but that is really what we’re talking about in that arena.

Jerimi Ullom:  This is an example of one that we’ve worked on that is still in the planning stages. Lots of boxes, lots of lines. This project was out in the western United States, it involved a healthcare system. It involved a new nonprofit that was being created. It involved the local community college. It involved the local city. And it also involved a private developer, and then subsequently a private manager. And so all of them were coming together. The health system would brand the project, it would be built on its campus. The new nonprofit was going to serve as the owner of the project. They could finance that project with tax exempt debt. They would likely get a property tax exemption as a nonprofit owner. The private developer was obviously going to build it and then they were going to manage the property on an ongoing basis. The host city was going to use the project in part particularly for their first responders, their police and firefighters, and then the local community college, this was a wellness center, they wanted it to be available to their students.

Jerimi Ullom:  So we’re able to cobble together all of these parties in a P5, not a P3 project, to try to pull together a structure that worked and a credit that worked and an underlying cashflow that worked.

Joel Swider:    So Jerimi, when somebody talks about a P3 or P5, you’re saying that they could take really any number of forms in terms of-

Jerimi Ullom:  Yeah. And in fairness, the three refers to the three P words, not the number of parties. I just like to say that because oftentimes these projects involve many, many parties. If you think about them as multi ventures rather than joint ventures. My point is there’s nothing particularly sacred about P3, and I think people often hear that phrase and think there’s some magic to it and it’s really just about bringing the parties together and what can each add.

Jerimi Ullom:  Another model that we see gaining some traction is a nonprofit foundation, nonprofit real estate foundation models. Some of you may have seen this, may have heard about it recently. This is a model that’s been around for a while in higher education. We’ve seen it with student housing projects, with research facilities and the like, and we see that migrating to healthcare. We’re working on our first two projects with this model, both of them in the southern United States, and it’s really just an alternative to for-profit or developer or REIT ownership of a facility. So if you have facilities that maybe the health system doesn’t want to own, so they’re looking to maybe have a developer or a REIT or a for-profit entity own those projects and lease them back to the health system, this would be one potential alternative to that. You can almost view these entities as alternative landlords that are in the nonprofit space and maybe a little more aligned with the nonprofit mission of the healthcare providers.

Jerimi Ullom:  Very flexible, by and large willing to structure and finance and put the project together in any way the health system would like because of their nonprofit mission to try to serve the health system rather than a for-profit mission to try to enrich themselves. So this is one to keep an eye on. I’m sure we’ll be getting some more information out there. If you have interest in this model, my colleague Andrew Dick did a podcast with one of the players in this model recently and you can, I’m sure, find that by searching Hall Render Podcast, Hall Render Real Estate Podcast. And if all else fails, contact us and we’ll make sure you get it.

Jerimi Ullom:  And then, because I can’t resist boxes and lines, this was what one of those nonprofit real estate foundation deals look like. So, not simple, but can be a very, very good alternative to some of the for-profit players in the real estate development industry.

Jerimi Ullom:  And with that, Joel, we’ll see if we have any questions that have come in. I don’t believe we’ve seen any in the chat room, but if you have any beyond this, feel free to contact myself or Joel or really anyone at Hall Render.

Joel Swider:    Yeah. And special thanks again to the Indiana Hospital Association, Michigan Health and Hospital Association, and the Ohio Hospital Association for inviting us. And we hope to talk with you soon.

Joel Swider:    Remember that the views expressed on this podcast are those of the participants only and do not constitute legal advice.

 

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Challenges and Opportunities in Health System Property Management with Lorie Damon

Challenges and Opportunities in Health System Property Management with Lorie Damon

An interview with Lorie Damon that was recorded in Scottsdale, Arizona at the Health Care Real Estate Legal Summit sponsored by Hall Render. In this episode, Joel Swider interviews Lorie Damon, the Managing Director of Cushman & Wakefield’s Healthcare Advisory Practice. The Cushman & Wakefield Healthcare Advisory Practice provides healthcare organizations with strategic and transformational real estate services that directly affect positive business outcomes.

Podcast Participants

Joel Swider

Attorney with Hall Render

Lorie Damon

Managing Director, Cushman & Wakefield

Joel Swider: Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Joel Swider, an attorney with Hall Render, which is the largest healthcare-focused law firm in the country. Please remember that the views expressed in this podcast are those of the participants only and do not constitute legal advice. We’re in Scottsdale, Arizona today at Hall Render’s Health Care Real Estate Legal Summit, and I’m pleased to have with me Lorie Damon, the Managing Director of Cushman & Wakefield’s Healthcare Advisory Practice. We’re going to be talking today about trends in property management and some of the challenges and opportunities facing health providers in managing their real estate. Lorie, thanks for joining me.

Lorie Damon: Thank you. I’m pleased to be here.

Joel Swider: Lorie, before we dive into the property management, I wanted to get to know you a little bit and start with your background, who you are and how you came to be such an expert in the area of healthcare real estate services. You earned your bachelor’s degree from Hood College in English Literature, your PhD from Purdue, and you also taught a course at Harvard. How did you get into healthcare real estate?

Lorie Damon: Purely by accident. I am classically trained. I was trained to be an English professor, and I spent a number of years teaching. I ultimately decided that that was really not the career for me, and I came back to Washington D.C., which was my college home, and I found a job working in a trade association as the editor of their magazine. One of my colleagues there left shortly about a year after I had joined the firm, and she went to work at BOMA International, and a year later, she called me and said, “Hey, we have this job as our Director of Education.” “Would you be interested? You should interview.” We’re doing a lot of online learning, which I had done. I had piloted some online learning programs at Purdue, so I interviewed at BOMA, and I took the job, and I didn’t know a thing about real estate or healthcare real estate, except that I went to doctors in medical office buildings, but I had a really great … I had the best luck in that BOMA had a small Medical Office Buildings Conference that they asked me to be in charge of, and I am curious, so I had the good fortune of learning from some of the industry leaders by virtue of asking them to speak and contribute content to BOMA’s conference. I learned a lot from John Winer, who was then at Ernst & Young, and now is at Seavest, Todd Lillibridge was one of the first investors in medical office, and I used to talk with him every week to get a primmer on why somebody would buy a medical office, Gordon Soderlund, Danny Prosky, I mean, some of the luminaries in the industry and some of those who are really early, early to commit to this sector were, taught me the business. Then, out of that, in order to create our strategy for growing the conference, we really wanted to have the perspective of health systems, so I was always the person calling somebody and saying, “Oh, I’m sorry. I can’t pay you an honorarium, but would you be willing to come and speak at my conference?”, and so I really established good relationships and listened to those health systems and to real estate companies, trying to navigate their portfolios, right? I always say that one of the most important lessons that I learned is that the real estate industry wasn’t really built for healthcare, and has always, I think struggled in some ways to accommodate healthcare because healthcare doesn’t fit easily into some of our sort of standard boxes to classify their real estate or classify the occupants or classify the owners.

Joel Swider: That’s interesting to think of BOMA MOB Conference as a small conference, right? I mean, there’s what, thousands of people now, and you guys have really grown it?

Lorie Damon: There are 1,500 people there, but in my first BOMA Conference, there were about 100, and I was one of two women.

Joel Swider: Yeah, okay. Wow. Okay. Wow.

Lorie Damon: It was a great experience to watch that conference grow. Some of that was just the luck of market timing because the sector was starting to take off, and there was more interest in it, but I think it was also just very good fortune and having the right set of volunteers who were industry leaders and who were good at recognizing that the industry itself needed to come together and create a venue where we could talk about some of the more complicated matters of working in this sector, and where we could create a forum for health systems, and investor owners, and developers, and property management companies to sort of collaborate and establish a track record of best practices and common procedures, if you will. A lot of that was, really did not exist, and in its essence, that is the obligation of BOMA as the industry’s leading trade association, so it made sense. It gave us the perfect venue in which to do that. Then, one volunteer, we were so fortunate because one volunteer would recruit another. I can’t even tell you how many hours of time all of those folks that I mentioned not only spent teaching me, but just contributing to the industry so that we could have a body of knowledge about this particular sector.
Joel Swider: Sure. How long have you been with Cushman now?

Lorie Damon: I’m in my sixth year.

Joel Swider: Okay.

Lorie Damon: I will finish my sixth year in December.

Joel Swider: Okay. In my mind, I think about BOMA as, as you mentioned, it’s a trade association. You’re sharing best practices. For someone that wasn’t involved maybe on the operational side before you, before your role, and maybe I’m overgeneralizing, but how did you transition then from BOMA? You had a lot of knowledge and expertise to where you are now, where you’re really applying that for clients.

Lorie Damon: Yeah. I think one of the things that was very advantageous about my role at BOMA was that I really had a bird’s-eye view on the whole industry, right? I wasn’t in it. BOMA sits outside of it, but can see all of the things, all of the major real estate firms, regional firms, smaller firms. All of those folks are BOMA members, and there’s a cross-section of owners, and management companies, and brokerage houses who come together to comprise the membership at BOMA, and my job, I was just fortunate because my job was education and research, so I was at the crux of understanding, “What does the industry need, and then how should we teach them?” Well, in order to teach them, I had to learn it, and then I had to determine from all of the variety of sources of information about, well, for instance, “How do you create a compliant timeshare lease?” Well, it would be my job to distill seven different opinions into what looked like the most common set of practices, and then work with, in those days, I would call Bob Hicks and say, “Could you take a look at this, and make sure that we’re not communicating something that’s inappropriate or inaccurate?” All of that activity really helped me to understand how the industry worked, and like I said, how some of the methodologies for serving healthcare could be adapted to better suit the needs of that particular client base. Coming to Cushman, coming into the industry, I did have some reticence about that because I knew all of the firms, and I sort of knew, as they would say where all the bodies are buried, but I really felt like there was a great opportunity there too, to bring a body of knowledge that none of them would have by themselves to bear on a sector that was growing, and demanding, and evolving very quickly, and so I wanted to road test that theory.

Joel Swider: Sure. How has it gone?

Lorie Damon: Well, it’s been a great ride. Well, certainly, Cushman itself has undergone a number of changes. When I joined the firm, I joined one of the legacy firms, so we came together now as an entity. Cushman & Wakefield was a merger of Legacy Cushman & Wakefield, and then DTZ, and prior to that, Cassidy Turley, so we are about 10 times bigger than the company that I joined. We’re international now. We’re a publicly traded company, so we’ve seen a lot of changes on our side, but through the auspices of that, we now have an extraordinary array of services and capabilities that are really only possible with our size firm, and so that has been great because so much of that, as healthcare systems are looking at retail opportunities. I have colleagues who are retail experts. I can pick up the phone and call one of them. I have a colleague who’s an opportunity zone expert, and I can top that base of knowledge. I have a counterpart in London who we have some mutual investor clients. We also have a couple of health system operating clients in common, and so we can regularly compare notes across the pond and start to forge a truly global perspective on healthcare, which is exciting.

Joel Swider: Sounds like a powerful platform and a value add.

Lorie Damon: It is a powerful platform, for sure.

Joel Swider: Yeah. What are, I guess some of the benefits to people listening, benefits of outsourcing their property management through a platform like Cushman’s?

Lorie Damon: There are many benefits to outsourcing, but I always remind my teams and our clients that the best solution is the one that works best for you, and in health care, I just don’t believe that one size fits all. I think in any exercise where you’re looking for a partner, it’s really important to understand how you want, first of all, “What do you mean by property management? What needs to be managed? Let’s look at what those activities are. Which ones do you really want to do yourself for whatever reason?” You can do it better. You can do it more cost-effectively. For internal relationship purposes, you just need to retain that or to risk manage. You just need to retain it. “What do you want to do, and then what do you need a partner to do?”, and so I think one of the best arguments for working with an outsource service provider is that we house real estate expertise. We hire it, we train it, we groom it, we promote it. All we do is think about it, and we can invest in and deploy a variety of tools that might be prohibitively expensive, right? Lease administration is a very expensive technology, and we can work with a variety of platforms, so if that’s not a capability that you have, and you want it, and you can’t afford it, then that’s a good opportunity to look at having a service provider. If you don’t have a big enough facility management team to service a growing outpatient portfolio, if it’s just physically dispersed, and your FMs are based on your hospital campuses, it is not necessarily efficient to run those maintenance talks in a car from the campus out to a surgery center. In cases like that, I think it’s really important to be very transparent and collaborative upfront to understand, “What are the goals?” “What are we trying to accomplish, and then what are you able to accomplish? What do you want to accomplish yourself, and then what do you need help with?”, and then find, if we’re not the right partner, find a partner who’s equipped to address those needs and to do it in a manner that’s consistent with the health system’s philosophy for servicing its assets.

Joel Swider: What are some of the biggest challenges right now facing health systems in terms of managing their real estate? We’ll get to opportunities as well in a second, but what are some of those challenges?

Lorie Damon: Right. Well, I think one of the biggest challenges that I see and that I know a number of my panelists talked about today is just that their portfolios are growing, and they’re growing really rapidly, but their staffs are not necessarily keeping pace. The technologies that they use to manage those portfolios may not also be keeping pace, and so I think that’s really a challenge because in some cases, those portfolios have doubled or quadrupled in size, and it’s a lot. That can mean that you went from having 100 leases to 400 leases, and that’s difficult if you don’t have additional people to manage them. Healthcare leases get touched a lot, and so there’s sort of a constant administrative burden that comes with that growth. I think one of the other challenges in healthcare in general, but at this particular historical moment is just that there’s regulatory uncertainty and there’s also just an evolving set of regulations. I don’t mean just start getting a kickback, which has, in some ways, it feels like it’s always been with us, but I’m thinking about things like site-neutral payments, which dramatically impact how you pro forma a new site, and how you think about where to locate a new site. I think the push toward consumer-driven healthcare really changes the dynamics of site selection, and that’s a different set of skills and a different set of tools than what many health systems have historically used to figure out where they want their real estate. I think there’s just a lot of evolution in the sector now to adapt to a new regulatory environment and just a new consumer that requires a different set of real estate tools and skills than what we maybe had even 15 years ago when I started at BOMA and realized that that medical office was an asset class, and that people invested money in it.

Joel Swider: Yeah. What then are some of the opportunities on the flip side of that?

Lorie Damon: I think that some of the biggest opportunities are to really embrace the data. Embrace data is sort of my mantra. There’s a lot of data available that health systems have themselves about their patients and about future demand that doesn’t always make its way into real estate decision-making, but should and could create a much more foolproof strategy around where to put particular services or particular facilities. I think there’s also a lot of … We could all do a better job of managing the data around how our assets perform as assets, and really understanding the way any investor would want to know, right? “What are we generating and operating in common rent in this particular facility? How much of it is occupied and how much of it is vacant? Are there opportunities to lease out what we already have? Are we paying rent on vacant spaces?” I mean, really, really, really mining the data that’s available to us to create a much more optimal portfolio, I think is a great opportunity and can drive some pretty significant expense savings.

Joel Swider: Lorie, I want to switch gears a little bit. The Health Care Real Estate Legal Summit has just concluded, and you had a panel discussion on property management trends, and specifically for healthcare facilities. Could you give us maybe a little bit of a recap, or what did you view as kind of some of the nuggets of information that you kind of took away from that or that our listeners might take away from that?

Lorie Damon: Sure. I think one of the most important observations from our panel is just that there are no two systems operate that activity the same, so Nancy and Laura from Mercy Health, they manage all of their real estate internally with internal teams, including internal legal teams. Ashley, our other panelist from Atrium Health has a combination of internal teams, including an internal legal team and then external resources, including our property management partner and external counsel. I think that’s always good to know that there are just different models that evolve for that various needs. I think a couple of the other things that we heard is that there’s a real … Both of them echo that understanding control, having both control but flexibility and their portfolio, and structuring that into leases or purchase and sale agreements, or options for buybacks has become absolutely critical, and there are many reasons for that. First of all, there’s a lot of new owners, new investors who are seeking opportunities in this space, and there’s also just a lot of dynamism around what the health system might want to do and when they might want to do it, so one of their goals is to try and optimize that footprint and their control over it so that as their care delivery evolves, their portfolio can quickly adapt to those new changes. Then, of course, we close by talking a lot about retail strategies and how they’re approaching that. Mercy has a pretty significant urgent care strategy that they’ve launched in St. Louis. It’s very fast. In nine weeks, they can have them open and they have literally kind of [led 00:17:01] star city with options on every corner, which is great and very convenient for patients, but they’ve partnered to do that because they recognize that they didn’t have the internal expertise to execute as quickly as they needed to. I think we got a pretty good cross-section of some trends that other health systems everywhere else are grappling with.

Joel Swider: Yeah, and I guess that’s … Maybe I’ll close with that question. We heard from a couple of of well-respected health systems. I know you have the opportunity to work nationwide with a vast number of others. Is what we saw today representative or are there other trends or other approaches that you’ve seen that are kind of on the rise?

Lorie Damon: I think what we saw today is fairly representative. I think most health systems are really, are in some sort of growth mode, at least for their outpatient services. They are looking hard at taking care closer to the patients. I think that’s a fairly common refrain and a common strategy. What varies is the manner and form of that execution. On a lot of how you execute your outpatient strategy depends on who you are and where you are, and who your competition is. We’ve seen in some markets, urgent care is really popular sort of to the point of saturation, and other markets, we’re seeing experimentation with all new sorts of facilities like micro-hospitals, for instance are evolving, and we’re starting to see that. There are only 50 now. In two years, will there be 250? I don’t think we know. Freestanding EDs have come, and in some markets, they seem to be here to stay, and other markets, they seem to be really challenged. I think we’re definitely seeing an evolution of the types of outpatient facilities, and in the strategy for how you create an outpatient strategy to capture market share and to serve as a patient base. I think the other interesting evolution is this focus on the patient, and patient-centered care, and how that translates into the real estate footprint. I mean, Laura made a great point about how much effort Mercy is investing in creating branded facilities that look alike, so that the minute a patient steps into them, they know they’re in a Mercy facility. I definitely see that in all the markets that I visit. There is a much greater focus on making sure that hospitals have clear signage, that patients know where they’re receiving care and from whom.

Joel Swider: Well, Lorie Damon, thank you so much for being with us. It’s been a pleasure talking with you.

Lorie Damon: It’s a pleasure to be here. Thanks, Joel.

Joel Swider: Thanks. If you like what you heard on this podcast, please subscribe on iTunes, and if you’re interested in additional content from Hall Render, you can send me an email at jswider@hallrender.com subscribe to our monthly newsletter. Thanks again.

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Outlook for Nonprofit Health Care Sector

An Interview with Ken Gacka and Allison Bretz of S&P Global Ratings: 

In this episode, Joel Swider, a health care real estate attorney with Hall Render, talks with Ken Gacka and Allison Bretz of S&P Global Ratings about S&P’s Nonprofit Healthcare Outlook for 2018 and what to expect in 2019. Ken Gacka is the Senior Director & Analytical Manager of Healthcare Ratings at S&P, and Allison Bretz is an Associate Director for U.S. Public Finance at S&P. More information on global health care finance is available at S&P’s website: www.spratings.com/healthcare.

Podcast Participants

Joel Swider

Attorney with Hall Render

Ken Gacka

Senior Director & Analytical Manager of Healthcare Ratings at S&P

Allison Bretz

Associate Director for U.S. Public Finance at S&P

Joel Swider:                        Hello, and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider, and I’m an attorney with Hall Render. Today we’ll be talking with Ken Gacka, senior director and analytical manager for health care ratings at S&P Global Ratings, and Allison Bretz, associate director at S&p Global Ratings. We’re going to be talking about S&P’s 2019 outlook for the U.S not-for-profit health care sector, which is expected to be released early next year. Ken, and Allison thanks for joining me.

Allison Bretz:                     Thank you for having us.

Joel Swider:                       Walk me through the types of services that S&P provides to health system clients. Of course today we’re focused on the nonprofit health sector, but I assume this process will be similar in the for profit sector as well. Let’s say a hospital or a health system comes to you, says, “We want to issue tax exempt debt, we’re going to pay for a new hospital building. Take us from there.”

Ken Gacka:                         Sure, thanks Joel and thanks for having us. To give you some context, S&P is not for profit health care team it’s a part of S&P’s U.S public finance practice. U.S Public finance issues ratings on over 22,000 entities across the U.S, the not-for-profit health care team focuses on the health care especially. We cover a wide range of hospitals and health systems across the U.S, we have over 500 organizations that we rate. They range in size, and range in services offered, so we rate organizations with revenue basis as high as $75 billion to those as small as $30 million. So we have a wide range of clients that we interact with, and you have all shapes and sizes in between, large multi facility health systems, critical access hospitals, academic medical centers, integrated delivery systems that have both the provider arm and an insurance arm. We cover a wide range of organizations, and we find that to be very important as we analyze the sector and keep our finger on the pulse of the trends and emerging credit risks that may be out there. Our team is comprised of 16 health care specialists located across the U.S.

Ken Gacka:                        When we interact with our clients, you’re right it is typically tied to a debt issuance. So organizations will come to market, and we’re a key part of that process giving our opinion of the credit worthiness of the issuer. That starts really an ongoing relationship, so every year then we speak with the client, get an update on their financial position, their strategies, and so forth. And determine whether the rating needs updated, either upgraded, or downgraded, or through an outlook revision. It’s really part of an ongoing relationship that we have with each of our clients once we first initiate the rating.

Joel Swider:                       I suppose that depending on your analysis, then that may affect the borrower’s interested rate, or maybe the amount of debt that they’re able to issue. Is that right? What is the next step after that?

Joel Swider:                       (silence)

Joel Swider:                       And that’s all right if you don’t know. I realize that you’re not bankers here.

Ken Gacka:                        I’m sorry. No, that’s … sorry, I was on mute Joel. I’ll just start again here from your question. Yes, the rating is one piece of information that goes into determining interest rates that an organization may have to pay for their debt. I find often as well that the rating serves as a good benchmark for an organization, in fact we have some organizations that don’t have rated debt. They carry an S&P rating so that they have that discipline that comes with the process so that they can compare themselves to others in their peer group across the standard methodology like we have.

Joel Swider:                       Sure. I guess Allison, could you give us some more background as to … we’re looking at the sector outlook, what are these outlooks and what are they designed to do?

Allison Bretz:                     Sure. The sector outlook is a piece that we release at the beginning of every year that summarizes our expectations for the not-for-profit sector, the outlook encompasses our view of the whole sector and where we think the balance of rating actions might lead for the upcoming year. It’s an opportunity for us to address the big picture, the post to much of our work with covers individual hospitals or systems. It’s really our way of stepping back, looking at the sector as a whole and saying to the market, “Here’s where we think ratings might fall next year, and based on what we’ve learned in the last year here is why we think that.”

Joel Swider:                       Okay. Your … primarily in terms of the raw data that you’re looking at for the outlook, I assume you’re going to look primarily to the hospitals or health systems, whoever your clients are who you’ve been examining throughout the year. Is that right?

Allison Bretz:                     Right. We look at financial data that’s publicly released, audits and interim financials, as well as data that’s shared with us from these hospitals and health systems. We look at our conversations with the management teams, and the materials that they’ve provided to us. Since this is a more wholistic perspective, we also take a look at the industry as a whole. We look at the industry trends beyond just hospitals and health systems, state and national legislative moves, or things that we might see upcoming in the U.S economy as a whole. All the things that play a role in shaping the sector beyond just the players that we work with.

Joel Swider:                       Who’s the primary audience then for your … again, talking about the outlook in particular, who’s the primary audience for that?

Allison Bretz:                     Our audience is the investor communities, so the individuals that read our reports. But as Ken alluded to earlier, our hospital and health systems also read the outlook with great interest and so of course they can frequently get bogged down in their own individual issues. So I think it’s a helpful perspective for them to look at how we’re viewing the industry as a whole, and what we’re hearing from other players in the market.

Joel Swider:                       As we’re looking toward 2019, I was reviewing your 2018 outlook. We’re not 20 … 11 months into the year, 10 months since you released the 2018 outlook. I’d like to look at some of the topics that you have focused as being significant factors that contributed to your outlook, and maybe get a feel for whether those predictions really came to fruition, or whether we’re going to see maybe some changes in those particular areas for next year. Starting with M&A activity within the sector, you had mentioned in your 2018 outlook that M&A activity remains heightened within the sector, and at that generally supports credit quality depending on merger effectiveness. Could you explain that a little bit? How does the heightened M&A activity support credit quality?

Ken Gacka:                        Sure. I might take a step back with this one, and talk a little bit first about the reasons why we’re seeing so much M&A. I think then that would dovetail nicely with the question of the supporting credit quality. M&A in health care has been around for a long period of time, we’ve been seeing mergers and acquisitions for decades. Now, I think the reasons why you see M&A has evolved over the last several years, in the past I think the players were often very clear it was going to be a large, strong health system acquiring a perhaps struggling smaller standalone hospital. You were going to see the M&A driven by desire to scale up so that you can take advantages of economy’s scales, and have more leverage to pay or send suppliers. What we’re seeing now is those reasons are still very important, but we’re also seeing that these mergers and acquisitions are driven by competency based needs, so organizations that may be looking to add a service line, or a geography that they don’t have that’s important to their longterm strategy.

Ken Gacka:                        Also, I think there is a real play based on the nature of the operating environment being difficult, I think a lot of organizations do see the need in the time of tightening margins to be able to partner with a larger organization to be able to expand or to invest in IT infrastructure which is very costly. When we see some of these organizations pair up with another organization, we often see the smaller troubled credit maybe getting bought up by a large organization still today. In fact as we look at our rating actions this year, we’ve got quite a few that were upgraded just by virtue of being acquired by another organization. For instance, present health, a triple B category credit was acquired by Ascension this year and that was an upgrade. That sort of lens to one of those reasons why one may consider partnering with another organization.

Joel Swider:                       Sure. I’m going to ask a dumb question, if we see a general increase in terms of credit quality because of … as you mentioned, you might have an entity with weaker credit quality being acquired by a higher rated hospital or system. Is there any sense in which you want to maintain a bell curve? Or does it look bad if we’ve got all of these tax exempt hospitals having very high credit ratings, and very few in the lower categories? Or does that not even really come into play?

Ken Gacka:                        It muddies the numbers a little bit because you do … if you did look at our rating distribution over time, you would see a pretty clear bell curve. Oftentimes those on the far right of the curve, so the non investment grade credits are acquired and that double B rating goes away and it becomes an A if it’s taken on by a stronger organization. I don’t think it’s a bad thing, but it muddies the water a little bit on … it mutes how loud the view is of the negativity in the sector.

Joel Swider:                       Another issue that you had discussed in your 2018 outlook was legislative and administrative risks, you had said that they would remain ongoing and that the ACA repeal and replace initiatives, and the likelihood would also impact as well as the likelihood of raising uninsured rates. What are we predicting for next year? Obviously we just had an election, any difference in that category?

Allison Bretz:                     I would say that the election did present some changes, I think we’ve identified a few key factors. With Democrats now in control of the House, I don’t think we expect further repeal and replace legislative efforts. We did see several of those over the last two years, but I think that will cease now that Republicans no longer control the House. With that said, I think we do expect some movement from Washington still that could decrease insurance coverage. There’s been a lot of conversation about allowance of short term, or skinny insurance plans which may not fully cover basic benefits meaning that even if individuals appear to be insured, they still are not paying out of pocket, or not being able to pay for many services. We’re also seeing supportive, more stringent requirements for Medicaid work requirements which may result in lower coverage. But on a state level, we did see voters in Idaho, Nebraska, and Utah vote to expand Medicaid. We saw general improvement in ratings in states that initially expanded Medicaid under the Affordable Care Act, and so also I think expansion will be generally positive for hospitals and health systems operating in those systems; Utah, Idaho, and Nebraska.

Allison Bretz:                     We’ll be watching to see how quickly the expansions are implemented, and the ultimate size of the newly covered populations. But I think that’s generally a credit positive for operators in those states. Overall I think the election was mostly positive from a health care perspective, but we will continue to see some push out of Washington to decrease insurance coverage … maybe not through explicit legislation, but through some of these efforts at the margins.

Joel Swider:                       Sure. It’s interesting to think that sometimes gridlock is a good thing when it comes to not seeing seismic shifts in some of these policies. Another point that you made in your outlook last year was looking at nontraditional players and their significance in the market, you had said at that time you didn’t really see that happening within the year, in other words by 2018 year end. Does that remain for 2019 too? Or is this going to be the year we start seeing some more shifts in terms on those nontraditional players; Amazon, CVS, and those types entities?

Allison Bretz:                     I think we’re expecting this to not be a major issue in 2019 as it has not been in 2018, at least for our hospitals. Let’s say we are I think likely to see some more tangible things, the CVS at the merger was recently approved, the Berkshire Hathaway, JP Morgan, and Amazon company has named it CEO and seems to be forming a structure. 2019 should provide some clarity on strategy from these nontraditional players, but I don’t think we expect yet to see them really eat into the market of our traditional providers at the hospitals. We are seeing more movement to nontraditional revenue streams from our hospitals, and I think inpatient revenue used to be their bread and butter, and where they made most of their money. That’s really no longer the case, we’re seeing much more revenue driven from outpatient ventures, other joint ventures that are not necessarily the traditional heads and beds that hospitals have provided.

Allison Bretz:                     I think we do expect that to continue in 2019, and to see competition from ambulatory surgical companies, urgent care, and other providers that maybe do provide care outside of the traditional hospital setting, but maybe not from these disruptors that have been making the news so much. I think that might be a little bit slower to move into the industry.

Joel Swider:                       And you’re talking Allison too … I mean do you think that there is any sort of siphoning off of some of the maybe healthier patients? In our own office, every year we’ve got to get a physical for insurance purposes, or it gives us a benefit in terms of our insurance rate. Some people will go and get their physical at let’s say at Walgreens, or CVS, or one of these doc in the box type places. Are we going to see any kind of siphoning off of some of the healthier patients in these nontraditional settings, which I guess would in turn leave hospitals with the older, sicker patients, which presumable are less profitable? Any truth to that?

Allison Bretz:                     Absolutely, there’s truth to that. I think that’s already very much happening, and it has created some of the revenue pressure that is reflected in our median, the decreasing operating margins over the last few years. We have seen hospitals and health systems invest more meaningfully in getting a piece of that pie, so they’re buying up Urgent Cares, they’re partnering through joint ventures with Urgent Care providers. Some of them are putting their own clinics into Walmart, CVS, Walgreens, et cetera. They’re really making an effort to get a foot in the door and provide services in more convenient lower cost settings of care because they recognize that many young healthy commercial insured individuals don’t want to come to the hospital for basic services, and if they don’t need to they’ll seek it in a more convenient setting. So I think going forward the providers we expect to be most successful are those that are able to provide care in more creative ways, and a different setting than just traditional hospital.

Joel Swider:                       In terms of some of the raw data that you analyze through your outlook, I looked toward the end of your 2018 outlook. You have several charts, and you showed an increase in the 2017 data regarding the number of ratings downgrades and revisions as compared with recent years. There were also more negative than positive downgrades and revisions, has that trend continued so far in 2018?

Allison Bretz:                     Yes, it has. To the first nine months of 2018, we’re seeing a similar trend with slightly more negative rating actions than downgrade. We’ve had 29 negative outlook changes, and 21 positive outlook changes. Of the 279 rating actions, we’ve had for the first nine month of the year about 7.5% were upgrades, and 10.4 were downgrades. So that trend has continued, but it’s important to note that 82% of those rating actions were affirmations. Overall there is tremendous underlying stability of the sector, and that really reflects the stable outlook we had coming into the year. We have seen more downgrades than upgrades, more negative rating actions, but overall 4-5 rating actions, or a little more than that were affirmations reflecting that real underlying stability in these credits.

Joel Swider:                       Another interesting chart that you guys had published in your 2018 outlook was days cash on hand, it looked like that had been increasing while longterm debt and capitalization percentages had been decreasing. Do you have any idea why that is? And whether that might have an impact on, for example, building, and construction in the future?

Allison Bretz:                     Days cash has been increasing for a few reasons. I think over the last few years we’ve had very strong investment markets, and not for profit hospitals … not universally, but generally tend to carry thoroughly large investment portfolios. So as the markets have done well, they’ve seen real growth and liquidity so that’s helped support growth of days cash on hand. At the same time we have seen construction slow down somewhat across the industry, large projects do continue but I think they are fewer than they were several years ago. We’re not seeing as many major towers, or large scale patient bed construction projects. Instead investment is a little bit more strategic, so many hospitals and health systems as I alluded to before are looking to invest in smaller scale outpatient facilities either on their main campuses, or in the markets were they’re located. Then we’re also seeing investment in IT, so not physical improvements to buildings but investments in software system and other technology that helps them remain competitive have and become more efficient.

Joel Swider:                       One last chart I wanted to focus on from your 2018 outlook, you had shown that nonprofit median operating margins fell sharply … pretty sharply anyway from 2015-2016, and S&P put out another set of medians in July of 2018 which showed a continuance of that trend. To the untrained eye this looks bad, is this a red flag?

Allison Bretz:                     Sure. I’m not sure it’s a red flag, but I do think it’s a trend that we expect to continue. It’s one that we’ve seen for last few years as operating margins continue to decline. Revenue growth has really plateaued, reimbursement continues to worsen, so payer mix deterioration which includes movement from patients on commercial insurance to patients on Medicare, as well as weaker reimbursement from those commercial payers is affecting that overall revenue base. Then on the expense side we’re seeing really significant growth and supply costs, especially for pharmaceuticals, specialty pharmaceuticals in particular, and salary and wage pressure as competitions for providers … especially nurses, and other mid level providers grows. Those two things combined as you might expect is very much squeezing operating margins across the industry, and I think we do expect that to continue. What we’ve seen over the last few years, particularly with healthy investment market is that non-operating returns have offset some of this, and so debt service coverage remains reasonably healthy and overall cashflow is fairly strong. I think the red flag, or something to be concerned about as we look into 2019 is the fact that investment markets may slow.

Allison Bretz:                     We’ve seen a downturn just over the last few months, and I think there is some concern that we’re not going to see the kind of investment returns we have historically or certainly over the last few years which would both affect liquidity as we’ve talked about, we might see slower growth on days cash on hand, but also will affect cashflow. Those investment returns are going to decline, and may no longer be able to offset the fact that operating margins are getting weaker.

Joel Swider:                       Let’s shift and talk a little bit more about 2019, I’m assuming that you’re well underway in terms of looking at your outlook for next year. We’ve talked about a few issues, any other thoughts about what you’re seeing for 2019? You had mentioned briefly in the 2018 outlook about the Tax Cuts, and Jobs Acts, and also the removal in advance for fundings. What are we seeing in those areas, and in the other areas in 2019?

Allison Bretz:                     As we mentioned, I think we’ll continue to see softening operating margins, I think the challenges that we’re seeing across the industry will not abate and competition is becoming more fierce everyday. These nontraditional providers are coming in, and there are just more places than ever as you alluded to for people to get some of the services that they have traditionally received at hospitals. That continues to be a challenge, and I think we expect operations to be difficult. Mergers and Acquisition activity is likely to slow somewhat, partly because there are just some markets where there is no one left. There’s not any further layers, or any further mergers that can take place. But there are certainly still plenty of small hospitals that will continue to struggle, and many of them may seek part partners in these larger systems. And they need that support from a larger scale provider, so maybe some slowdown on M&A but I think we do expect it to continue. Then from the Tax Cuts, and Jobs Act, from that perspective, advance refundings are gone, they’re no longer legal except in cases of murders and acquisitions.

Allison Bretz:                     For six months after a merger acquisition you can’t do a tax exempt refunding to consolidate debt, so leading up to that in late 2017 we saw a flurry of issuance from players concerned that there would be no tax exempt funding at all. That fortunately turned out not to be the case, but we did see a fairly slow pace if issuance in early 2018 since many people accelerated those plans and went ahead in late 2017 although things have picked up later in the year. Going forward, I think we started to see some less traditional or different debt structures as a response to the Tax Cuts, and Jobs Act. We’re seeing more taxable refundings, or taxable that issuance is generally. That market continues to mature, and then variable rate debt structures have also become more popular. So some changes in the structure of the debt that we’re seeing issued which I think is somewhat a response to that Tax Cuts, and Jobs Act.

Joel Swider:                       Interesting.

Ken Gacka:                        The only thing I would add Joe is … I agree with everything else and said on trends that we expect to continue, and we are in the phase now of evaluating the data in preparation for the launch for 2019 outlook. That will be coming in early 2019, so be on the lookout.

Joel Swider:                       Okay. Well, great. Before I let you guys go, whenever I get the chance to talk with somebody who’s an expert in their particular field, I just love to hear how they came to be at their current position. Allison, curious how you came to be in the public finance world, and also in particular in the health care sector?

Allison Bretz:                     Right. My undergraduate degree was in public policy, I’ve always been very interested in policy, and the nature of the public sector. I worked briefly after college for the city of Chicago, and then in finance for a large private university. So really started to get some experience in the not-for-profit sector. During that time I was also volunteering extensively in hospitals, and got really interested in the business of hospitals, and how hospitals operate. I ultimately went to graduate school and got a degree in health policy and administration, and I’ve been at S&P ever since. I really became interested in the inner section of health care policy in business, and hospitals sit really nicely in at that intersection. This has been a great role for me to learn about that world.

Joel Swider:                       Well, great. Thanks again Allison. And Ken I was looking at your bio, I saw that you had a background working at a health system in the past in Pennsylvania. Tell me about that and how you came to S&P?

Ken Gacka:                        Sure. I’ve been in health care for a long time, over 15 years in different capacities, different sides of the table. My first job out of undergrad was working as a financial analyst for the Commonwealth Health System in western Pennsylvania, I worked there for about five years in the finance area. Went back to grad school, I got my MBA and realized I really really enjoyed health care, the dynamic nature of the operating environment and decided that I would continue in the sector but on a different side. I got into health care consulting doing strategy consulting, reimbursement consulting, visibility studies. That got me to the point where I started to interact more with the rating agencies, and opportunity came up with S&P about 10 years ago and I was thrilled to join the not-for-profit health care team as an analyst. I’ve been here for 10 years, and pleased to say I now have the opportunity to lead a great team of analysts covering the evolution of our health care operating environment. It’s been a great journey, and we still have a lot of exciting times to come in our health care world.

Joel Swider:                       Yep, you’re absolutely right we do. Well, before I let you go, is there … where can people go to learn more? Is there a subscription list? Or other … where can people access your 2019 outlook when that is released?

Allison Bretz:                     I would encourage people to visit our website with is spratings.com/healthcare that site is great because it provides a combination of materials from our team not-for-profit health care, as well as our for profit team which includes for profit hospitals, medical devices, and pharmaceuticals, as well as our insurance team which covers the insurance industry. It’s a really nice marriage of materials from all three of our groups, and it also includes reportings of webcasts that we’ve done over in the last year, announcements and events that we host. We do host a few events around the country every year, and I would encourage people to attend if that is of interest to them. As well as articles that we’ve published, both sector outlooks, the medians, and other subject specific articles about the health care industry. So that’s sptratings.com/healthcare for all your health care needs.

Joel Swider:                       Great. Well, Ken and Allison, thanks again for joining me.

Allison Bretz:                     Thank you so-

Ken Gacka:                        Thank you.

Allison Bretz:                     … much for having us.

Joel Swider:                       If you like what you heard on this podcast, please subscribe on iTunes. If you’re interested in additional content from Hall Render, you can send me an email at jswider@hallrender.com J-S-W-I-D-E-R@ hallrender.com to subscribe to our month newsletter. Thanks again.

 

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Illinois Property Tax Exemptions

An interview with Mark Deaton and L.J. Fallon – Illinois Property Tax Exemptions: 

In this episode, Joel Swider interviews Mark Deaton, General Counsel for the Illinois Hospital Association, and L.J. Fallon, General Counsel for the Carle Foundation, about a recent decision impacting hospital-based property tax exemptions. 

Podcast Participants

Joel Swider

Attorney with Hall Render

L.J. Fallon

General Counsel for the Carle Foundation

Mark Deaton

General Counsel for the Illinois Hospital Association

Joel Swider:                        Well hello, and welcome to the Health Care Real Estate Advisor Podcast. I’m Joel Swider, and I’m an attorney with Hall Render. Please remember that the views expressed on this podcast are those of the participants only, and they do not constitute legal advice. Today we’ll be talking about the recent Illinois Supreme Court decision in Oswald v. Hamer and its impact on property tax exemption for Illinois Hospitals. I’m joined today by LJ Fallon, Executive Vice President and Chief Legal and Human Resources Officer at the Carle Foundation Health System, and Mark Deaton, Senior Vice President and General Counsel at the Illinois Health and Hospital Association. LJ and Mark, thanks for joining me.

LJ Fallon:                             You’re welcome.

Mark Deaton:                    Very welcome.

Joel Swider:                        So, Mark, let’s start with you. Could you give us some background, fill us in on what’s been going on over the past six or seven years with respect to property tax exemptions for Illinois hospitals, leading up to Oswald, which we’ll focus on in just a minute?

Mark Deaton:                    Sure. Well, six years ago, what I will call the New Statute, section 15-86 of the Property Tax Code, became law in Illinois. That New Statute was the subject of the Oswald case that you mentioned. Six years ago, our Department of Revenue started applying the New Statute immediately, and granting hospitals property tax exemptions under that new law. But the law was also immediately challenged in court that very year, and in one of those cases, the Carle case, that I think we’ll talk about a little bit more, the appellate court declared the New Statute unconstitutional in January 2016. So, at that time, our Department of Revenue stopped processing applications under the New Statute. But that ended up being about a one year hiatus, because in December of ’16, a different appellate court appealed the New Statute in the Oswald case, and DoR started applying the law again. The unfavorable Carle appellate court decision was eventually vacated, and I think that pretty much brings us up to the present, when our Supreme Court appealed the statute last month.

Joel Swider:                       Mm-hmm (affirmative). Well, and could you give us, before we proceed further into these two cases, the Carle case and the Oswald case, give us an idea of the distinctions between the two statutes that are at play here? There’s Section 15-65 of the Illinois Property Tax Code, which is kind of the general charitable statute, and has been around for a while, and then 15-86 which is the one you just mentioned, which applies only to hospitals and has a balancing test component to it?

Mark Deaton:                    Sure. You put your finger on one distinction between what I’ll call the old law and the new law. The old law applied, generally, to all charitable organizations. So not just organizations but things like YMCAs or Scout camps or museums, et cetera. The new statute applies expressly to hospitals and health systems. The old law was really rather murky and fuzzy, not quantitative, whereas the new law, designed for hospitals, is very specific, mathematical. It measures the value of healthcare services that are delivered to the poor and underserved, and then it compares that number to the value of property tax exemption.

Mark Deaton:                    One huge problem under the old statute is that the language was very close to the constitutional test, which still applies. The Constitution requires that property be used exclusively for charitable purposes, and the old statute required that the property be owned by an institution of public charity. So, very similar language, and it led to a lot of confusion. I think the primary distinction is the new law applies only to hospitals and health systems, and it is a very quantitative, mathematical test.

Joel Swider:                       Okay. And, of course, there’s a Constitutional Directive here too, that I think overlays both of these statutes. And maybe we’ll get into that as we talk about these cases. LJ, switching gears, the Carle Foundation Health System has been involved in its own property tax exemption battle, which started before Oswald, endures past Oswald, and continues to the present day. Could you give us some background on Carle’s tax exemption challenge from the City of Urbana, Cunningham township, and what’s been going on? How much is at stake here?

LJ Fallon:                            Sure. So, this all generated in the late 20th century, 1999, early 2000. The for-profit Carle Clinic Association and the not-for-profit Carle Foundation entertained the idea of integrating, or merging. And what that would do for the local properties is, because Carle Clinic was for-profit it was paying property taxes on the properties that it inhabited. So there were concerns from the local entities, taxing bodies, that should there be an integration, that that tax revenue would go away.

LJ Fallon:                            So, the local taxing bodies were on alert. That being the case, the integration did not go forward at that time. The taxing bodies were still concerned, and that generated some discussions, and some actions, by those taxing bodies with Carle, and resulted, in 2002, in a settlement agreement that Carle reached with the City of Urbana, Cunningham Township, the park and school district, whereby Carle made some payments. Not strictly a payment in lieu of taxes, but made some payments over a five-year period. In return, those signatories to that agreement agreed that they would not challenge Carle’s property tax exemption going forward.

LJ Fallon:                            Roll forward, if you will, to 2004, and the Cunningham Township Assessor put specific properties of Carle’s, the Carle Foundation tax-exempt properties, on the tax rolls. Carle appealed that to the Board of Review. The Board of Review didn’t grant those exemptions. The matter ultimately went to the Illinois Department of Revenue who also found, by 2007, so there was some passage of time with the proceedings before the local Board of Review and the Illinois Department of Revenue. In 2007 the Illinois Department of Revenue for the four parcels at issue did deny the exemption request, stating that the properties were not in exclusive charitable ownerships, or charitable use. So, that, then, caused Carle to move forward, both with an administrative claim before the Illinois Department of Revenue, and its litigation in the circuit court regarding the, what Carle characterizes as the unauthorized action by the Cunningham Township Assessor to put those properties on the tax rolls. And a number of issues have been generated since then.

Joel Swider:                       First, I guess, give us an idea, I mean, it’s millions of dollars we’re talking about, right? I forget the number.

LJ Fallon:                            It is, yep. Yep, it’s $20.8 million now. During the course of the litigation, Carle did settle the matter with Urbana School District and Urbana Park District for approximately $7 million. So, there is some reduction in the amount that Carle could recover. So, the amount at issue is $20.8 million, but what Carle seeks to recover, after taking into account the settlement, is about $8 million.

Joel Swider:                       Okay. And part of the argument, as you were mentioning, is that, essentially, the Cunningham Township Assessor failed to enforce, or at least failed to properly enforce, the law as it existed at that time and as it now, still, exists. Is that right?

LJ Fallon:                            That’s right. That is our position. We did have a motion for summary judgment on that particular issue at the circuit court level, that was just ruled on in the last month and a half, and the judge at the circuit court level did not grant our motion for summary judgment on that issue, and believed that the assessor did have the authority to put those properties on the tax roll. So, that issue will be part of what is litigated in the trial that is currently scheduled for January 2nd of 2019. We disagree with the judge’s ruling on that motion for summary judgment and we believe the issue can either be appealed after trial, or can be the subject of a post-trial motion.

Joel Swider:                       Okay. Got it. So, one of the things, I think, that ties these two together is the fact that in 2016, as the case was winding its way through the courts, the appellate court said that section 15-86, which is that hospital exemption statute Mark was mentioning, could apply to Carle’s case, even though the tax years in question predated passage of that legislation. And, of course, we have this issue that has been raised in Oswald and, I think, now is going to come into play as Carle’s case was remanded, which is the constitutionality of 15-86.

Joel Swider:                       I guess, maybe, Mark’s … Could you tell us a little bit about what was the basis … And this is now, I would say, more to do with these earlier decisions, but what was the basis for holding Section 15-86 unconstitutional?

Mark Deaton:                    Sure. In some ways, it was very simple. As we’ve already mentioned a couple of times, there is a constitutional test for property tax exemption, and that cannot be waived or superseded by the legislature. So, the new statute says, essentially, if a hospital satisfies this new statutory test, the Director of Revenue shall grant an exemption to the hospital. So, the plaintiff’s argument in Oswald, and in Carle, I think, was that that statutory language, saying, “Shall,” was directing the Department of Revenue to grant an exemption without regard to whether the hospital satisfied the constitutional test. That the statute, the legislature, was somehow ordering the Department of Revenue to ignore the fact that there was a constitutional test.

Mark Deaton:                    So, the Illinois Supreme Court, in the Oswald case, last month, said, no, that was not at all the legislative intent. That it was clear from the preamble to the legislation that the general assembly understood that there was a constitutional test, and that statutes in Illinois do not have to expressly reference related constitutional provisions. A statute never has to say, “By the way, make sure you follow the constitution.” That that is taken as read.

Mark Deaton:                    So, boiled down to its essence, that was really the dispute in the Oswald case, and the Supreme Court resolved that by saying that both the statutory test and the constitutional test have to be satisfied by a hospital.

Joel Swider:                       Mm-hmm (affirmative). And, I guess, Mark, sticking with you for a minute, because I want to return to Carle and how this is going to impact that case going forward, but as part of the Oswald case, I mean, that was a facial challenge, right? Saying that there is really no set of facts under which a hospital could meet both the constitutional standard of charitability and exclusive use for charitable purposes, and could also meet this balancing test, because, as you mentioned, it was silent as to the charitable question. I guess, does that mean that hospitals just need to meet the balancing test? Or does that mean no, we need the Department of Revenue to continue to look at charitability, and maybe there’s even more of an emphasis now, after this case. What are your thoughts?

Mark Deaton:                    It’s always been our position, as the Supreme Court ruled, that hospitals have to satisfy both the constitutional requirement and the statutory requirement created by our, quote, new statute. The constitutional language says that exempt property must be used exclusively for charitable purposes. That’s the constitutional test. We refer to it as the, quote, use test. I think the big question on the horizon is exactly what does the hospital have to demonstrate, prove, or evidence, to satisfy the use test? Used exclusively for charitable purposes? That question was not answered in the famous [Purlina 00:14:14] decision back in 2010.

Joel Swider:                       Sure.

Mark Deaton:                    That court did not come to a decision on what that meant. Our position is that it’s a relatively simple, non-quantitative test, that if you’re using your property exclusively for providing healthcare for all who need and apply, that’s a charitable purpose. But I think that will be the next battleground for those who oppose hospital property tax exemption.

Joel Swider:                       I guess, switching back, then, to LJ, I mean, now we see, okay, the statute is constitutional, as Mark mentioned. The court talks about this. Well, you’ve still got to meet the charitable test. That was always part of it. In fact, that’s a key component of the argument. But how is this going to impact Carle’s exemption claims? They’re going to be governed by 15-86 as per that earlier decision. And Carle’s case has been remanded. Is that, and maybe this is a procedural question, is it still going to be adjudicated under 15-86, or is there some chance that the court would say, “You know, we take that back”? I assume that’s been settled at this point.

LJ Fallon:                            Right. So, we had claims in our case, both under 15-65, so the broader charity exemption, property tax exemption that Mark referenced, and then also under 15-86. So, after the Oswald decision, in the last couple of weeks filed a motion to dismiss our 15-65 claims. It’s our position that 15-86 and the Oswald opinion apply in the Carle case, and that, again, as Mark referenced, that the constitutional test, as articulated in the Oswald opinion, is … And we’re taking the position that the exempt property must be used to benefit an indefinite number of people by promoting their general welfare or lessening the burdens of government. So, it isn’t a quantitative standard, and it is one that we believe Carle meets, not only the use test, but also the ownership test as well. So, that will, obviously, be the subject of the trial, and that will proceed at the beginning of 2019.

Joel Swider:                       Okay. And, I guess, last question, then, LJ. I think the Oswald case was fairly limited, in the respect that it was a facial challenge. No set of circumstances, it was really kind of examined in a vacuum. Is there any chance, and obviously this is pure speculation, so we won’t hold you to it, but is there any chance that the court would say, “Well, you know what? As applied, here,” or maybe in Carle’s case or others, “As applied here, we don’t think it’s constitutional, because of …” For whatever reason. I mean, do you think that? Or do you think 15-86 is pretty well settled law at this point? Any thought given to that as you’re going forward?

LJ Fallon:                            I wouldn’t hazard a guess, because I will admit that some of the rulings that we’ve seen at the circuit court level, as well as, even, the appellate and Supreme Court level in the Carle case, have not necessarily followed the logic that we thought they might. So, is there a possibility that Judge Rosenbaum, who’s newly assigned to this case, would find that 15-86 doesn’t apply to the Carle situation? I suppose that’s always a possibility. We hope that that won’t happen, and that’s why we dismissed the 15-65 claims that we had as alternative claims in our lawsuit, so that the argument really would be focused on 15-86.

LJ Fallon:                            So, of course the judge could make that determination. We, of course, would appeal that. We believe that the Oswald opinion is solid, and, again, the question of exclusive use is something, again, that we believe is pretty clearly articulated in the Oswald opinion. The defendants in the case, as you would imagine, do not believe that to be the case.

Joel Swider:                       Interesting. All right. Well, this is certainly going to be one to watch, and, of course, good luck, LJ, with it. Because I think not only in Illinois, but I think other states are looking closely at this, and obviously we represent a number of hospitals in the Midwest and throughout the country that I think are … Their ears are perked up to see how this comes out. And these debates have been raging, as you know, in other states. So, we’ll be continuing to monitor that. LJ, I really appreciate, LJ and Mark, both of your time today. So, thanks a lot for joining us. I appreciate it.

LJ Fallon:                            You’re very welcome.

Mark Deaton:                    You’re very welcome. Thank you.

Joel Swider:                       Thanks, and I’ll remind our listeners for more Health Care Real Estate Content, please subscribe to our podcast. And if you’d like to be added to our monthly Health Care Real Estate Advisor newsletter, feel free to send me an email. Jswider@hallrender.com, J-S-W-I-D-E-R at Hall Render dot com.

 

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