A prescription for delivering healthcare facilities in today's high-cost environment

Inflation and high interest rates have put many big buying decisions on hold.

That's true not only for consumers, who are delaying home and car purchases, but also health care providers and real estate developers, who have hit pause on projects due to costs being about 50% higher than they were in February 2020.

The economic headwinds facing all industries are especially challenging for health care, as reimbursement rates from private insurance, Medicare and Medicaid have failed to keep pace with rising expenses, further lowering the feasibility of ground-up development.

Yet the current supply of health care facilities isn't enough to meet the growing demand for services - annual U.S. health care spending is projected to reach $7.2 trillion in 2031, compared with $4.3 trillion in 2021 - a challenge that's compounded by widely reported concerns over staffing shortages.

So what are some solutions?

• Rehab an older medical or commercial facility.

Sometimes the best health care facility is the one that's already there. Second-generation buildings with a solid shell, adequate parking and accessible entryways can be viable candidates for a top-to-bottom renovation that enhances their functionality and marketability. Such projects are less expensive than ground-up development and can be completed in a much shorter time frame.

Another benefit of these second-generation buildings is that they are often already located in densely populated areas where there's high demand for health care services.

• Lease facilities instead of owning them.

With margins getting squeezed, health care providers can partner with developers to free up capital that would otherwise be tied up in real estate. The provider still pays for some of the build out, including medical equipment and furnishings, but can allocate more funds to staffing and operations.

Leasing has worked well for many of our health care clients. For example, HSA PrimeCare developed and owns four buildings on the Silver Cross Hospital campus in New Lenox.

These include a two-story, 53,000-square-foot building with medical offices for pediatrics, women's health and orthopedics; the state-of-the-art University of Chicago Cancer Center at Silver Cross Hospital; a 30,000-square-foot business center that houses offices, hospital support departments, EMS training and IT for the hospital; and a 40,000-square-foot medical office pavilion occupied by the hospital's urgent care, occupational health and primary care clinics, among other medical tenants.

• Adjust to the new normal.

Moving forward, we must also reset our expectations on the basic costs of building and operating health care facilities. Typically, when the cost of goods rises, consumption declines. However, when health care expenses go up, use of essential services remains largely the same, particularly as all baby boomers reach the age of 65 by 2030.

The demand for new health care facilities is highest in emerging areas underserved by hospitals and independent clinics. For instance, the population of Crown Point, Indiana, rose 24.1% from 2010 to 2020 to 33,899, which follows the high-growth decade of 2000 to 2010, during which the population of the Northwest Indiana city rose 37.9%, according to the U.S. Census Bureau.

To meet the health care needs of these new residents, HSA PrimeCare purchased a 4.5-acre parcel of land in June 2023, on which we plan to develop two outpatient facilities totaling 60,000 square feet. We're positioning ourselves to respond to demand and deliver a solution for providers - including those based in the Chicago metro - that want to have a presence in new, less saturated markets.

Just as medicine never stops advancing, so too must the facilities that support it. As a real estate firm that has successfully navigated prior economic cycles, we know the prognosis remains favorable for providers who take preventive steps today to avoid growing pains in the not-too-distant future.

• Robert Titzer is executive vice president of HSA PrimeCare.