The Ankura Healthcare Real Estate Strategy team monitors a wide variety of economic indicators to inform clients’ upcoming strategic endeavors. Here are the ones worth watching in 2025.
Capital: Favorable Outlook
We anticipate thatinflation will ease and interest rates will decrease favorably in 2025, mitigating capital cost growth for systems. With rate improvement, systems will be better positioned to fund a range of projects, including new construction and facility improvements.
Following several years of uninterrupted growth, healthcare construction costsslightly softened in the second half of 2024, indicating a potential slowdown in expense growth and a return to a more normative four percent escalation/year for capital project planning in 2025 (from the four to seven percent seen in the post COVID-19 era).
As ambulatory growth continues, Medical Office Buildings (MOBs) will likely balance supply and demand in 2025, leading to increased asking rents per square foot and stable or decreasing vacancy rates.
Financial Performance: Another Recovery Year
Operating expenses are expected to stabilize as labor costs improve, driven bydeclining labor inflation rates and reduced contract labor usage.
Mergers, acquisitions, and partnerships will be increasingly focused on operational efficiency and shared expense reduction, withnew models like Longitude Health – in which multiple systems have come together to create a shared holding company to drive performance - setting a precedent for pursuing efficiencies at scale. With a goal of preserving capital for member systems, efficiency-oriented M&A and partnerships will facilitate cost reduction that can in turn be re-invested into mission-critical infrastructure projects for systems.
Health systems will faceescalating IT costs as they actively prioritize cybersecurity preparation as well as incident management and response, which will demand ongoing attention and investment. This cost escalation will require systems to ensure adequate capital capacity to maintain the necessary facilities, networks and systems, and contingency for incident management and response.
Policy and Funding: Uncertainty Abounds
Hospitals across many regions will actively prepare to align with new CMS payment models. In 2025, they will engage in pre-implementation activities for all cohorts of the voluntary Total Cost of CareAHEAD modeland gear up for the mandatory Bundled PaymentTEAM model expected to launch the following year.
Early indicators, including campaign promises and proposals from the first Trump term, would suggest that the Trump administration will focus on broad spending cuts as a mechanism to fund tax cuts and a host of other domestic agenda items. If these cuts include Medicaid spending reductions, states could seek to end Medicaid expansion.
ACA marketplace premium subsidies will expire at 2025-year end,increasing the uninsurance rate by 16%.
Technology and Innovation: Diverse Approaches to a Range of Challenges
Continued piloting, possible forthcoming guidance, and litigation will continue to inform new AI application development in 2025, helping to define appropriate uses, address risk, and expand functionality.
To address rising pharmaceutical expenses, hospitals will optimize pharmaceutical revenue streams, minimize supply chain disruptions, and drive innovation throughnovel drug acquisition strategies, such as direct-to-consumer distribution programs.
Incentive models for promoting hospital sustainability and decarbonization initiatives will expand. TheCMS TEAM model introduces new measures, including a voluntary greenhouse gas emissions reporting system and access to technical assistance and learning support for implementing decarbonization activities.
Sites of Care: Continued Shift to Lower Cost Settings
The Acute Hospital Care at Homewaiver will be extended, driving additional participation in the program.
Although post-pandemic telehealth utilization has stabilized,extended telehealth coverage flexibilities will empower providers to offer these services,broadening access and addressing patient consumerism.
Procedures willincreasingly move to the ASC setting, driven by payer pressure and patient preference. However, M&A activity will lead to more ASCs transitioning from physician ownership to ownership by health systems or integrated payer-provider (“payvider”) organizations.
What Can You Do?
- Evaluate reviving construction projects stalled during COVID-19 and interest rate hikes due to lower cost of capital. As escalation rates remain variable, a 4%/annum escalator on construction cost reflects appropriate caution.
- Reassess use rate and access assumptions to support greater adoption of ambulatory environments, which are less expensive to build.
- Decommission aging assets constructed to I-2 standards that are underutilized and costly to upgrade.
- To reflect the structure of partnerships and M+A, streamline the physical footprint of new facilities by consolidating administrative, lab, pharmacy, and supply chain functions in centralized warehouse-style facilities to lower construction costs.
- Prepare to allocate more capital to infrastructure such as data centers, secure networks, and telecom systems for supporting digital health and data analytics. Budget for ongoing capital needs for acquiring and upgrading medical tech, AI, and telehealth.
- Utilize predictive technologies to enhance demand forecasting, use space more efficiently, and distribute patients across available spaces to reduce overcrowding and underutilization.
- Challenge the assumption that greater patient volumes require larger facilities. Expand the use of telemedicine and Hospital at Home to alleviate pressure on capital allocation for construction.
Conclusion
The healthcare sector is poised for a transformative period in 2025. Organizations must employ a proactive approach to ensure they can capitalize on emerging opportunities in ambulatory services, optimize care delivery settings, and effectively manage shifts in reimbursement models.
