Healthcare Real Estate: Excess Capacity and Growing Costs

Authors:
Michael A. Anikeeff, John D. Benjamin, Peter Chinloy, and
Isaac F. Megbolugbe

Start Page: 353
End Page: 382
Volume: 15
Issue Number: 3
Year: 2007
Publication: Journal of Real Estate Literature

Abstract: An apparent paradox is the coexistence of excess demand by patients for medical services and excess supply by hospital and nursing home providers. The vacancy rate of licensed hospital and nursing home beds has been rising even as the total number of beds and hospitals has been declining as rates are regulated. This paper examines alternative explanations for this paradox. One explanation is that since providers receive similar rates from public and private insurers and other third-party payers regardless of quality, the healthcare sector effectively operates as a price-regulated industry. There is an incentive to carry excess capacity. A second is that the separation of capital and operating budgets leads to added construction even if unnecessary or redundant. A third explanation is that excess capacity is a convenience with an option value that allows patients and providers to have staff and hospital beds available at any time and location.