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September 2, 2024 Other Voices

Why REITs aren’t bad for the U.S. hospital system

By Fred McKinney

America’s hospital system is severely fractured and facing a crisis, but all the finger-pointing has been in the wrong direction.

Fred McKinney

Over the past several months, the U.S. hospital system has emerged as a battleground of crisis narratives, where finger-pointing at real estate investment trusts (REITs) has overshadowed the true crisis at hand.

While the headlines decry the perceived evils of REITs, a deeper and more insidious problem persists: the broken reimbursement system that underpins our healthcare infrastructure.

At the heart of the American healthcare crisis lies a reimbursement system that has been struggling for decades to keep pace with the actual costs of care. Hospitals, particularly those serving underserved and low-income communities, face an untenable financial squeeze where costs rise faster than the payments they receive.

Medicare, Medicaid and private insurers all play roles in this complex financial ecosystem, and they collectively contribute to a system that reimburses hospitals at rates that are often insufficient to cover the expenses of providing care.

The shortfall was $130 billion in 2022 alone. Hospitals are constantly battling with reimbursement rates that do not reflect the true costs of care, forcing them into a precarious position where they must stretch every dollar to meet operational needs. Some hospitals are able to edge by and stay open.

Regrettably, a growing number of facilities are forced to close. Indeed, 140 hospitals serving rural communities closed between 2010 and 2021, joined by urban facilities in Los Angeles, Chicago, San Antonio and Seattle.

Some academics and elected officials scapegoat REITs as villains in the narrative of hospital financial distress. The sale-leaseback model, where hospitals sell their properties to REITs and then lease them back, is portrayed as a predatory financial maneuver that strips hospitals of valuable assets and burdens them with unsustainable lease obligations.

However, this criticism overlooks several fundamental facts. Sale-leaseback transactions have been a proven lifeline for many hospitals. By freeing up significant capital tied in real estate, these transactions have enabled hospitals — urban and rural alike — to invest in critical infrastructure, modernize equipment and expand services.

They give hospital operators affordable, predictable and sustainable long-term lease payments. Far from being a financial death sentence, sale-leaseback agreements can offer a strategic financial tool that supports and expands hospital operations in times of critical need.

I came to this conclusion in my recent work, “An Economic Analysis of Sale Leasebacks in Healthcare.”

The real issue is not whether hospitals should or should not engage in sale-leaseback agreements, but whether the underlying reimbursement system allows them to thrive. To point fingers at REITs while ignoring the reimbursement structure is akin to blaming a Band-Aid for not curing a disease.

It is essential to recognize that the private sector has developed innovative solutions that address the real problems faced by hospitals. REITs, for instance, have introduced flexible financial models that have helped keep hospitals open during times of crisis.

By providing hospitals with immediate capital through the sale of their real estate, REITs have played a crucial role in enabling these institutions to continue serving their communities.

Instead of villainizing the sale-leaseback model, we should acknowledge its role as part of a broader set of financial strategies that address the real challenges facing our hospitals. The focus must shift from criticizing these financial mechanisms to advocating for a fundamental overhaul of the reimbursement system that directly impacts hospitals’ ability to function.

To truly fix the American hospital system, we need to address the broken reimbursement structure that fails to support the costs of care. Reimbursement rates must be adjusted to reflect the actual costs incurred by hospitals, ensuring that they receive fair compensation for the services they provide.

This involves revisiting payment models for Medicare and Medicaid, renegotiating contracts with private insurers, and implementing policies that ensure hospitals can cover their expenses.

REITs have cracked the code to keep hospitals open, not by creating problems but by offering solutions in the face of systemic failures. It is time to redirect our focus from criticizing financial strategies to reforming the reimbursement mechanisms that will ensure the long-term sustainability of our hospital system.

Fred McKinney is the co-founder of BJM Solutions, a Connecticut-based economic consulting firm. He is the emeritus director of the People’s United/M&T Bank Center for Innovation & Entrepreneurship at Quinnipiac University.

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