More pain ahead for big providers?

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James M. Berklan
James M. Berklan

Take it from a guy who's experienced the ups and downs of being, shall we say, not normally sized throughout life. There are definitely times when you prefer to be larger than others, and then there are instances when it's certainly not an advantage.

At times it's meant scoring more easily in basketball, not needing a ladder to paint ceilings and never having a cookie jar that's out of reach.

But it's also meant struggles finding suitable clothing (or having it outrageously priced), awkward side-by-side interviews, and countless hours in uncomfortable automobiles (and airplane seats and train cars and bus seats and … you get the idea).

Have you ever tried to be the 6-foot-7-inch youth trying to fade into a pack of drastically smaller kids as they run away after pulling a mischievous prank? It doesn't work well.

Bigger also doesn't always mean better in the long-term care world. At least not as certain "money” people now see it.

Standard and Poor's, the financial services company, issued a slightly alarming report last week about nursing homes. Its title: “Deteriorating Industry Conditions Have Several U.S. Nursing Home Companies Heading for the Exits."

To regular McKnight's readers, there wasn't necessarily a lot of news in it. We have reported in numerous ways about Kindred HealthCare's plans to exit the skilled nursing business, for example, as well as countless times about reductions in Medicare reimbursements and a general shift from Medicare to managed Medicare.

There has also been plenty written warning about labor costs and, of course, the "bane" of Clif Porter's existence (and countless other long-term care professionals') — the barreling shift toward value-based reimbursement and a certain value-based purchasing bill. It would brazenly swipe certain percentages of payment from skilled nursing operators and then dangle the hopes that good behavior and performance could earn them back only a portion of that which would be filched.

Such conditions are ripe for inflicting damage on skilled nursing providers, particularly larger ones, points out S&P Global Ratings analyst David A. Kaplan. The economies of scale that bigger firms commonly enjoy are being outweighed in this climate by liability concerns, shorter lengths of stay and ground down payments. Bigger companies are also bigger magnets for lawsuits, Kaplan pointed out when I spoke with him this week.

Smaller operators might have more unexpected advantages over larger ones. Closer relations with the local community, better referral patterns and not having “a target on their backs like big companies would” are all pluses for the non-gargantuan operators.

Kaplan called it an apparent broader trend of “reverse consolidation.” That's one way to say mergers and acquisitions are not shrinking the ownership base, which usually seems to be the “news” out of financial observers in any marketplace.

As a result, we're seeing really large long-term care companies unwind their businesses, whether it's landlords or operators getting out of leases, or real estate investment trusts spinning off divisions to lessen exposure. As a result, there are opportunities for smaller players to pick up local pieces to their puzzle and grow their portfolios.

The next few years will be critical. Some facilities might close, veteran observers like Kaplan agree. There will be pain, and disproportionately so for larger groups perhaps.

But the long-term is still in providers' favor, Kaplan feels, echoing a theme that American Health Care Association President and CEO Mark Parkinson has stumped for a couple of years. They feel that the demographic wave will — eventually — turn in operators' favor. To hear them say it independent of one another, and months apart, should be comforting to LTC professionals looking for silver linings.

“As the population ages and more get to 75-plus, there will be tailwinds coming. That will work well for them since a lot of their costs are fixed,” Kaplan explained. “Then you can really start to get to more profit.”

Parkinson has set the pivotal year as 2020. Kaplan is in the same ballpark.

“There is kind of a light coming, but it might not be a number of years until the population's tailwinds offset the headwinds we're now seeing,” he said.

In the meantime, it will pay for operators to have opportunistic eyes wide open, especially regional and smaller players. Operators that aren't highly leveraged can be more nimble and able to scoop up properties they're attracted to.

Despite some current heavy overtones, there is no reason to doubt that this needs-based service industry is going to fade away.

“There might be some [operators] who ultimately close their doors,” Kaplan allows, “but it's certainly an industry that will remain intact over the long term.”

The current cycle could mean a few years of softness before growth kicks in again.

“But maybe that shakes out some of the weakest players and makes the industry healthier for that next stage,” Kaplan pointed out.

That would be big news.

Follow James M. Berklan @JimBerklan.

Daily Editors' Notes

McKnight's Daily Editors' Notes features commentary on the latest in long-term care news and issues. Entries are written by Editorial Director John O'Connor, Editor James M. Berklan, Senior Editor Elizabeth Newman and Staff Writer Marty Stempniak.