After at least five years of strategic reductions, hospitals and health systems appear to be accelerating their departure from the skilled nursing and senior care sectors.
Rampant acute care acquisitions in decades past created new and sometimes awkward relationships, landing health systems in one part of the country with one-off nursing homes in markets they knew little about.
But the significant sell-off announced by the Evangelical Lutheran Good Samaritan Society last week underscores the need for consolidation many owners now face, several investment bankers told McKnight’s Long-Term Care News.
“Before the pandemic, it started out as a way to get scale,” Dan Hermann, president and CEO of Ziegler. “But ask any hospital system, and they’d all say the same thing: In today’s world of much higher operating costs and weak reimbursement, we believe in the post-acute, senior living services and care model, but we need the locations to be integrated with our health system locations for efficiency.”
Laca Wong-Hammond, managing director and head of mergers and acquisitions at Lument, noted a health system divestiture trend that dates to reduction of medical offices in the early 2000s. With the rise of accountable care organizations in 2012, many health systems began sinking capital into clinics and urgent care centers. That sparked a concentrated shift away from nursing homes and senior housing, but it’s hastening now, she said.
“COVID-19 amplified losses on what had been marginally profitable businesses, by accelerating the velocity of rising operating costs,” Wong-Hammond added. “In essence, if another owner can improve margins, the only question left for the health system is referral privileges. Once that is ensured, it’s only logical to exit ownership.”
According to the American Hospital Association’s most recent annual survey, the share of hospitals providing skilled nursing care dropped from 20.7% in 2016 to 17% in 2020.
An AHA spokesman on Friday told McKnight’s that ongoing financial pressures will likely continue to contribute to the trend. A December report from management consultant Kaufman Hall found hospital operating margins were in the negative, and down 44% compared to late 2021.
“Hospital-based SNFs make up only 3% of traditional Medicare spending on SNFs, but have extremely low margins. The most recent data available from MedPAC shows hospital-based SNF margins were approximately -50 percent,” AHA’s Ben Teicher noted in an email.
The 2.7% pay cut for SNFs in 2023 only compounded ongoing difficulties
Hospital geography at play
When Good Sam and Sanford aligned in 2019, it brought together the nation’s largest nonprofit provider of skilled nursing services with a health system centered around its Midwest hospitals and acute care clinics.
The decision to concentrate skilled care in the Midwest too will shrink Good Sam’s footprint by some 30%. President and CEO Nate Schema said revenues from sales would allow the organization to reinvest in seven core states, bolstering skilled nursing and other services there.
The first 10 buildings to be sold are going to Cascadia Healthcare, whose director of corporate affairs last week told McKnight’s that footprint was a key decision in his growing regional chain’s decision to buy.
“Increasing our presence in those states allows us to leverage already present resources to complement the current operations and create a value-add upside,” said Steve LaForte. “These are states where we know the reimbursement landscape and are active in the state associations, with growth creating additional synergies and upsides to care and outcomes for the communities.”
While Hermann predicted Good Sam would attempt to sell its remaining 25 properties in smaller portfolios, he said those could be further split in follow-up sales. And Wong-Hammond says proximity will factor into those moves, just as it did after the HCR ManorCare break up.
“Even their private equity sponsor grew tired of cutting checks to support satellite operations, and sold them less than a decade into the investment,” she noted. “As a result, the company and its assets have traded hands a few more times from 2017 to now. This should be a lesson for anyone who’s aggregating for only the sake of total size.”
Wong-Hammond praised Good Sam’s decision, given increased operating costs, strained labor supply and inflation and interest rates that have made it hard to secure financing as needs arise.
“Perhaps their leadership will empower other organizations to also accelerate strategic assessments, as it’s often said ‘no margin, no mission’ for good reason,” she said.
Nonprofit pressures building
In similar comments, Hermann noted the pressure is stacked for nonprofit providers who have a range of other service lines to which they’re committed. Boards’ expectations of earning 4- and 5-star ratings for nursing homes — a rating highly dependent on costly staffing — complicates decisions further.
“The chains are comfortable owning a larger number of homes, to create scale, whether geographically concentrated or not. They often own, outright or in partnership, other ancillary service lines, such as pharmacy, therapy, staffing, food services and tech companies. That’s where they make their value,” Hermann said.
Nonprofits, though, he said, cannot stand to lose money on skilled nursing-centric campuses or facilities under an operational style that puts quality ratings first.
“The values are holding up in the private sector, so it’s a better deployment of capital to go ahead and release those,” Hermann added. “Even though they’re sympathetic to serving seniors, they just can’t tolerate the below-appropriate level of reimbursement from the vast majority of states.”
And providers have gotten more comfortable with that approach in recent years, especially knowing they’re more susceptible to non-mission-based takeovers without planning. Since 2015, Ziegler found that 56% of not-for-profit nursing homes that changed hands went to for-profit buyers. Another 26% closed.
“Over the last 30 years with an acceleration in the last 10, it’s been a constant recognition that they can’t continue their mission of serving seniors across the continuum and be drug down, to put their entire organization at risk for money-losing nursing homes,” Hermann said. “In the old days, they’d hold on for years, 5, 7, 10 years with actual losses.”
More action to come
The health systems with largest remaining nursing home and senior living ownership include Sanford Health, Good Sam’s parent company; Ascension; Trinity Health, Covenant Health, Common Spirit, CHI Living’s parent company, UPMC, Providence, Avera, Centra Care, Aspira Health and Essentia Health.
Many of those systems have been shedding facilities in groups of 10 or so over the last few years. With that slow exit started, Ziegler’s senior living research director said she was not terribly surprised by Good Sam’s announcement.
“With them being part of the health system and the data and observations we have around health systems and how they’re perceiving the senior housing space, combined with just their national footprint, which can sometimes be hard to execute … it’s a lot to manage,” Lisa McCracken said. “Strategically, quite frankly, it really aligns with what we see other organizations doing at a smaller scale.”
Taken together with ProMedica’s decision to surrender its interest in more than 200 nursing homes and almost completely exit the nursing home sector, Good Sam’s move can be viewed as health systems making a “bigger commitment” to downsize, McCracken said.
