2023 Outlook Survey

Nearly 40% of skilled nursing owners, top executives and administrators expect they will sell some or all of their nursing home holdings in the coming year, the McKnight’s 2023 Outlook survey reveals.

Among all respondents, including nurse supervisors, that number declines to 36.3%. But parsing the numbers in any manner shows the sector is likely to see more significant merger and acquisition activity in the coming year, a prediction seen among healthcare M&A experts, as well.

And respondents were firm in their responses. Last year, providers were largely uncertain of their future plans for skilled nursing holdings, with 42% reporting they were “not sure” whether they would sell some, sell all or merge, hold all, acquire some or sell and acquire facilities. This year, just 12% were uncertain.

In this year’s survey, the share of all respondents who think their organization is likely to sell all or merge more than quintupled — from 3.8% to 19.2%. And the share likely to sell some jumped from 7.6% to 17.1%.

“They see what’s ahead,” John R. Washlick, a healthcare M&A attorney and transactions specialist at Buchanan, Ingersoll & Rooney told McKnight’s after reviewing survey data. He said he was unsurprised by the findings, expecting already strong mergers and acquisitions activity to ramp up as financial pressures catch up with nursing home owners who have been struggling to sustain operations and withstand the pressures of escalating costs. 

“It’s somewhat of a perfect storm when it comes to the inflation and Medicaid and Medicare, if those rates don’t change and keep us with at least inflation. It’s really a lost battle if their rates go up and their revenue stays static,” he added. “Activity is still very robust. If someone is thinking about selling, they should be able to find a buyer.”

That outlook is bolstered by the McKnight’s survey findings, which show nearly 34% of owners, executives and administrators expecting their organizations to acquire some facilities in 2023.

2023 outlook

But Bill Kauffman, principal at the National Investment Center for Seniors Housing & Care, cautions that predictions about 2023 activity may very well be tempered as per-bed prices adjust to the current market.

“There’s some price discovery going on,” Kauffman told McKnight’s in late December. “A seller was looking at these historical prices, especially in the last couple of years. Even through COVID, those price-per-bed acquisitions were relatively high. Some of these sellers going into 2023 might have thought that those prices were still relevant, and I would argue that there needs to be some price adjustment … especially in light of not just the challenges in the skilled nursing industry from a fundamental operational perspective, but also now with interest rates.”

This year’s Outlook Survey was conducted by email from Nov. 22 to Dec. 9. McKnight’s Long-Term Care News garnered nearly 1,000 responses from nursing home owners, C-suite leaders, administrators and nurse supervisors for its annual year-end survey.

Interest rate pressures resonate

Higher interest rates, overall inflation and the inability to predict what’s coming next in a volatile market are all factors likely adding pressure on those who may be mulling a sale.

“The biggest challenge is the (rate) increase and the speed of the increases,” said Jim Bodine, executive vice president at investment banking firm HJ Sims. “It’s unprecedented.”

Providers used to borrowing in a historically low-rate environment were hit by seven Federal Reserve rate increases in 2022. The last followed news that inflation had dropped back slightly to 7.1% by late November, but Fed officials have indicated more hikes will be coming in 2023. 

In addition to operating margins that have dropped considerably, leaving less cash on hand, much higher rates make it unlikely providers can borrow all they need to pursue key capital projects — a factor experts say often leads to sales.

Continuing rate hikes also have fueled ongoing talk of recession among many sector observers.

“We’re starting to see the effect of that on slowing the economy,” Bodine added. “That’s going to take a number of quarters to work its way through the system.”

Washlick says many are now getting their ducks in a row. He notes the ongoing pressure is especially hard on nonprofit organizations.

“If they do a one-year, three-year projection and they don’t think they’re going to make it, they almost have an obligation to find a buyer, particularly if it’s a nonprofit with a mission,” Washlick said.  “They don’t want to abandon the residents or compromise the care of the residents. They need to go through that [exercise].”

Dyan McAlister, chief financial officer at Presbyterian Senior Living, acknowledged at a LeadingAge Pennsylvania finance conference late last year that nonprofits are facing “a constant pull between mission and margin.” Her organization, like many other life plan communities, continues to scale back or delay construction projects due to rate hikes. Presbyterian, the nation’s 13th largest nonprofit provider of skilled beds in 2021, also has intentionally reduced its number of skilled nursing beds and dropped to No. 26 in 2022 Ziegler rankings.

Re-licensing beds is an increasingly popular strategy among life plan communities, one Washlick said providers with multiple asset types are likely to continue pursuing to strengthen their bottom line this year.

Size, diversity deliver protection

Like Kauffman, Washlick sees great variability depending on the market. He predicts states with Medicaid reimbursements that haven’t kept pace with rising costs will see major activity this year. But he also believes organization size is an important factor regardless of a facility’s location.

There’s consolidation where, to really survive, you’ve got to be bigger and have synergy and economies of scale that help in the operating environment,” Washlick noted.  “A lot of the newer operators are in that range of 10 to 40 nursing homes and getting bigger, and they understand the [importance] of size and the economies of scale that you get from streamlined administrative services, plus those ancillary services.”

Ancillary services such as pharmacy, therapy and home health lines look attractive to a large share of McKnight’s survey respondents, with 34.4% saying they will likely be more involved with them in 2023. Respondents also said they’d be likely to be more involved with speciality services (42.6%), including dialysis, pain management and ventilator care; and nurse practitioners or other advanced practice clinicians (36.9%).

2023 outlook

Such expansions can be viewed as a way to offset losses in other areas, such as long-term care stays. But they’re also a smart move for those moving toward a sale, Washlick added.

Of course, expanding services and adding new lines of care takes investment. And in some places, that may be out of the question.

Operators in states “that are not forecasting any increases in Medicaid reimbursements, they’re going to have a hard time trying to sustain and withstand the pressures of operations costs,” Washlick added. “There will be plenty of operators who will be looking for a buyer.”

FRIDAY: Survey-takers weigh in on growing Medicare Advantage enrollment and alternatives

PREVIOUSLY: Providers warn of broad closures, agency reliance under possible staff mandate: 2023 Outlook Survey; Spiraling costs threaten growing optimism for skilled nursing in 2023 Outlook Survey