Health Care with Professor Christopher Palmer (Ph.D MIT) UC Berkeley
HEALTHCARE AND IMMIGRATION POLICY: IMPACTS ON REAL ESTATE. PART I: HEALTHCARE
Thank you for joining me again… It has not been entirely consistent yet, but my goal is to syndicate one podcast each week on a Tuesday morning. This week though, in response to listener requests, I am splitting part of the conversation I had with my guest Professor Christopher Palmer at UC Berkeley, into two, slightly shorter, podcasts. In the first, we discuss the effect of changes in healthcare policy on the real estate industry. The second looks at how the Trump doctrine of America First might also impact our industry. Both are available at www.nreforum.org/podcasts .
One of the policy issues that dominate Washington’s agenda is healthcare. It is an issue that has been a high priority for prior administrations, and continues to remain a high priority for the current administration. But the pendulum like swings in policy from the pre-Obama era, through the Affordable Care Act, to the Trump administration’s ‘repeal and replace’ discourse, causes considerable uncertainty not just now, but as real estate investors attempt to predict the future.
So it is my great pleasure to welcome back Professor Palmer. I am very grateful to him for agreeing to be my guest again. In today’s conversation, he and I talked about why a possible reining in of real estate investment in the healthcare industry might result from uncertainty as the Affordable Care Act is restructured. Professor Palmer also shared his thoughts on why Senior housing which, on its face should be more immune to short term policy fluctuations, may also not be quite as invulnerable as some might like to think.
It seems intuitive to me that with as pro-business a government as we have now, there could only be optimism for the real estate industry. So I asked Professor Palmer a question… The Trump administration has a three prong stimulus plan - reduce taxes, spend heavily on infrastructure, and relax regulations – won’t this be a great boost to the real estate economy?
UNCERTAINTY IN POLICY IS DESTABILIZING FOR REAL ESTATE
Uncertainty in healthcare policy and the direction it is headed is not good for planning developments, like hospitals, for example, because not knowing how patients are going to be reimbursed for their medical expenses creates doubts as to how development investments will be returned. The healthcare industry does have some immunity to shifting policy changes because it takes a long term perspective, and because demographic trends that point to a large aging baby-boom population will have some flattening effect on the impact of policy changes.
As the population ages we are going to see greater spending in healthcare related real estate. However, demographics are not a panacea for overriding unpredictability in healthcare. Insurance is how most people plan to pay for their healthcare, so with the ACA we had this roadmap laid out that defined how people were going to be able to finance their healthcare expenditures, but with that being rolled back, once again there is considerable uncertainty across the industry. Which is the anomaly: the Affordable Care Act, or what is the current plan being debated in Washington the anomaly?
Opportunities may arise from identifying those properties that are now seemingly distressed healthcare assets, and acquiring them with the view that in five years time, something that looks more like the ACA will again be the government’s mandate.
SENIOR HOUSING - STRONG DEMOGRAPHICS, BUT HOW WILL SENIORS PAY FOR IT?
Senior housing has been, and continues to be a very successful space in the real estate industry. The aging of the baby boomer generation reaching retirement age and increasingly likely to need senior housing facilities seems, on its face, to be a positive tailwind. However, one thing to watch for is the impact the retirement savings crisis in the United States, and of underfunded pension obligations on long term viability of the senior housing market. Institutions and municipalities have underfunded pension plans that are a looming problem, and combined with an atrociously low savings rate in the United States, the prognosis for how this cohort of aging people is going to retire is not good, let alone how they are going to afford medical expenses, and the costly option of entering senior housing facilities to live out their days. This certainly mitigates the likelihood that senior housing is going to be a sure thing as far as providing certainty on the investment horizon.
SUMMARY
There are two takeaways from today’s discussion with Professor Palmer. The first is that the current uncertainty about the healthcare industry creates difficulties in making medium and long term predictions upon which to base underwriting assumptions. However, if you have a firm opinion about whether the Affordable Care Act was a healthcare industry anomaly, or that the Trump administration’s repeal and replace policy is the anomaly, you may be able to find opportunities trading with those on the other side of that debate. The second pertains to the senior housing sector which, though enjoying some tailwinds due to aging population demographics, may yet experience turbulence as its target market finds it increasingly difficult to pay for the services on offer.
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Thank you again for joining me in part one of this two part episode. Please join me again for part two, when I discuss with Professor Palmer the impacts of the America First doctrine on the real estate industry.