Hospitals might be faced with a heavy financial burden if an upcoming lease accounting rule is passed. Switching a lease agreement such as medical equipment and real estate from an expense to an asset, the rule in its current form could cost hospitals thousands to millions of dollars in lease commitments.
From its origins in the late 70’s, lease accounting for hospitals has allowed equipment and real estate leases to be considered an operating lease, counting it as a monthly expense, not an asset, and more importantly, not needing it to go on the balance sheet. The rule has helped hospitals grow technologically from leasing expensive medical equipment as well as geographically by having developers, like myself, own and finance new medical facilities. It’s an overall useful way to assist with business pressures.
Negative impact for medical real estate?
Using third parties to finance and own real estate projects is a common strategy for health systems. With this rule in effect, it may be more advantageous for healthcare providers to own and finance the project themselves, resulting in a more costly and energy absorbing process. Estimates are in the $1 trillion range for additional balance sheet expenses. With hospital executives scrutinizing and over-analyzing hospital operations, this will negatively impact their ability to grow in a manner where leasing is involved, be it geographic footprint or otherwise.
The many concerns:
Hospitals primary mission is not leasing or owning medical office buildings, but with this rule in effect, it will make hospital reevaluate how they do business. By not owning medical office buildings, hospitals free up debt capacity enabling them to invest in technologies and equipment to better promote their real primary mission – patient care.
Like so many things in healthcare, it’s the lack of certainty that is making health systems and hospitals indecisive on how to move forward. Similar to healthcare reform, hospital executives are waiting to see how the rules will unfold.
James Ellis, CEO, Health Care Realty Development Company, is a nationally recognized successful real estate investor and developer of medical office properties with a comprehensive knowledge of sophisticated real estate transactions, cost effective designs, and efficient property management.
Aaron Razavi is Associate Marketing Director at Health Care Realty Development.
Visit their blog at http://www.hcrealty.com/medicalrealestatedevelopment/