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Post-acute care facilities are an integral part of the healthcare delivery system, representing the next stage in treatment after hospitalization for severe health episodes. In a new report Colliers International took at look at this segment of the system.

PACs Face Cost Pressures

One top line finding is that the pressure to reduce the length of hospital stays in the general acute care setting is fueling growth in the number and range of PACs. Another is that PACs too are facing the pressure of controlling costs while remaining competitive through the provision of best-in-class services, Colliers International says. "Hospitals, which are often responsible for the quality and cost of services after discharge, are heightening these pressures by narrowing their PAC referral networks and prioritizing high-quality, low-cost settings."

Companies That Dominate the Sector

Five companies dominate the PAC landscape, each with annual net revenue of higher than $3.5 billion in 2017: Kindred Healthcare, Genesis Healthcare, Brookdale Senior Living, Select Medical Corp. and Encompass Health. Most of these companies focus on a variety of models such as long-term acute care, skilled nursing and inpatient rehabilitation facilities.

Capital Markets: Sales and Pricing

As with the medical office sector, PACs have become established as a real estate investment vehicle in recent years. Annual investment in PACs rose from $1.6 billion in 2014 to a peak of $3.9 billion in 2017, according to Colliers International. PAC investment fell in 2018 to $2.8 billion, reflecting broader trends in the medical office sector. However, this decline is more indicative of a limited supply of available product in the market rather than any waning investor interest in the sector. Cumulative PAC sales volume from Q1 2014 to Q2 2019 was $13.5 billion, of which IRFs accounted for 55% ($7.4 billion) of the total. A deeper dive into inpatient rehabilitation facilities shows that they have significantly lower cap rates and higher pricing than other PAC assets. The higher pricing is partly a reflection of the higher costs of construction and fit-out for IRFs, Colliers International said.

Inpatient Rehabilitation Sales

There have been several IRF sales greater than the average price of $408 per square foot since Q1 2018, including a series of transactions in the $450 to $460 per square foot range. The high watermark during this period was set by the acquisition of Warm Springs Rehabilitation Hospital in Austin, TX by The Sanders Trust for $27 million at a price of $495 per square foot. Colliers International reports that the key concern surrounding IRFs is reimbursement, as they are heavily reliant on federal reimbursements, and most of their patients use Medicare. As with most aspects of healthcare, Colliers said, legislative changes in policy and payment models, plus their impact on financial performance, need to be closely monitored. "However, the mandate to lower healthcare costs is industry-wide and IRFs are generally considered a lower cost of care setting which should help sustain their attraction to investors," it concluded.