Skilled nursing’s changing business model

by Jeff Shaw

New and existing facilities add more creature comforts to boost the lucrative short-stay business.  

By Jane Adler

 As skilled nursing operators and building owners sort out how to respond to the changing healthcare landscape, a dramatic transformation of the sector is taking shape.

Take, for example, the developer Mainstreet, which has already built 25 new projects in five states with another 50 projects in 11 states under development. The Carmel, Ind.-based company is building projects focused only on transitional care — short-stay patients whose expenses are reimbursed by Medicare payments or private insurance. The centers do not take long-term care residents, whose expenses are often reimbursed by Medicaid. 

Mainstreet currently owns 21 of the properties, which are usually sold to investors at some point. Last year, Toledo, Ohio-based Health Care REIT agreed to acquire 17 Mainstreet facilities under construction with the right to purchase 45 future properties. Mainstreet does not manage the buildings, but instead works with operators such as Genesis HealthCare and the Ensign Group. 

The typical Mainstreet buildings — branded as “Next Generation” facilities — have 75 to100 licensed skilled units. But, in a bit of a twist, the properties also include about 30 assisted living units. Seniors who aren’t ready to go home, but who don’t need nursing care, can move temporarily to the assisted living units. Seniors pay out-of-pocket for the assisted living stay.

“This model is so different,” notes Zeke Turner, founder and CEO at Mainstreet, and a fervent advocate of transitional care built around the needs of the consumer seeking an alternative to the traditional nursing home. “One of the hardest things we’ve had to do is educate the market.”

Mainstreet’s business model also addresses changes in a healthcare system as it moves from fee-for-service payments to reimbursements based on quality of care. At Mainstreet, seniors undergoing rehabilitation have an average length of stay of about 20 days, compared with the old industry standard of about 30 days. 

The 10-day difference creates a savings for Medicare and managed care systems looking for ways to cut costs. “We offer seniors a high-quality place that gets them well and back home at a lower price point,” says Turner. “It works for every party in the system.”

 

Short stay is in favor

The skilled nursing sector has traditionally been divided into two segments: short-stay patients recuperating after surgery or an illness; and long-term care residents often suffering from chronic conditions that require 24/7 supervision and care. Many buildings offer both types of care. 

The steady stream of payments from private insurance, Medicare and Medicaid continues to be a viable business model, operators claim. Despite low margins, buildings can generate reliable income as long as occupancies remain relatively high.

In the top 31 markets, nursing home occupancies averaged 88.5 percent in the first quarter of 2015, according to the National Investment Center for Seniors Housing & Care (NIC). Occupancy rates have been fairly level over the last two years. 

Since Medicare and insurance reimbursements for short-term stay patients are generally higher than for long-term care residents on Medicaid, nursing homes have been beefing up their facilities in order to boost short-stay business. 

Developers are adding state-of-the-art therapy gyms and amenities such as game rooms and spas. They are also adding private rooms to attract consumers. 

The changes come at a time when skilled nursing facilities are themselves aging. Many buildings are 30 years old or older, and in need of a makeover. 

Another concern is the rapidly evolving nature of the business. Referral sources are beginning to rely on quality outcomes, such as low hospital readmission rates, rather than on the longstanding personal relationships of the past. Amid a big focus on cost cutting, home care is emerging as a less expensive alternative to a short stay at a facility. 

“People will still need nursing homes,” says healthcare consultant Anne Tumlinson, founder and owner of Anne Tumlinson Innovations based in Washington, D.C. “But the business model is changing.” 

For now, many real estate companies like the short-stay business model. 

Sabra Health Care REIT (NASDAQ: SBRA) recently purchased three nursing homes with a total of 171 beds for $41 million, or about $240,000 a bed. “Five years ago, no one would have believed that price,” says Jason Stroiman, president of Chicago-based Evans Senior Investments, which brokered the deal. (The seller was not disclosed.)

The pricing cap on nursing homes has traditionally been about $70,000 a bed, he says. But over the last 10 years, there’s been a huge uptick in the prices that investors will pay for buildings with a strong Medicare resident mix. “Wall Street has no cap,” he says. “If the cash flow supports the purchase price, the price per bed doesn’t matter.” 

According to nationwide data from NIC, the price per bed on a rolling four-quarter average as of the first quarter of 2015 was $89,417. Nursing home transaction volume for the same period was approximately $5 billion, up from about $3 billion a year earlier. 

In the case of the Sabra buildings, they were purchased from private investors who had bought and completely renovated the properties several years ago. The investors had updated the common areas, and all the rooms had been converted into private units. 

The investors had also repositioned the buildings and opted out of the Medicaid long-term care program to focus on short-stay patients whose expenses are paid by Medicare. As a result, building revenue increased to $25 million and net operating income rose to $5 million. 

At the time of the sale to Sabra, the buildings were generating a net operating income (NOI) margin of 25 percent, according to Stroiman, noting that both public and private investors vied for the properties. He adds that competition for properties is not only generating attractive prices, but also resulting in favorable terms, such as non-recourse loans and low security deposits.

Overall, cap rates for skilled nursing facilities have been slowly declining. Cap rates fell from about 12 percent in the fourth quarter of 2009 to about 10 percent in the same period of 2014, according to New York-based Real Capital Analytics. 

 

Consolidation ahead

Other healthcare REITs are attracted to the nursing sector because it fits nicely into the continuum of care for seniors. REITs also see an opportunity to be on the cutting edge of a consolidation wave. The conventional wisdom is that scale is a way to deliver services at a low cost.

Ventas announced plans in April to spin off its local and regional skilled nursing properties into a new REIT to be known as Care Capital Properties Inc. Also in April, Omega Healthcare Investors completed its acquisition of Aviv REIT, creating an $11.4 billion company with more than 900 properties in 41 states (see sidebar, page 23).

“We’ll start to see real estate companies look at the skilled nursing sector in a different way,” predicts Arnold Whitman, chairman of Formation Capital, who spoke at the recent NIC 2015 Capital & Business Strategies Forum in San Diego. “The real opportunity is the diversification of post-acute care services.”

 

Operators fine-tune business models

Genesis HealthCare operates 508 skilled nursing facilities across the country owned by four REITs under sale-leaseback agreements. 

Genesis, which is based in Kennett Square, Pa., has grown quickly — more than doubling the size of its portfolio in the last two-and-a-half years. Genesis acquired Sun Healthcare Group in 2012, and several months ago Genesis completed its merger with Skilled Healthcare Group. 

“We have tried to bifurcate the portfolio,” says Carol Rohrbaugh, vice president of business development at Genesis. She explains that the portfolio consists of two separate products: long-term care
units and short-term rehabilitation units. She figures about 60 percent of the company’s business is long-term care and 40 percent is short-term care. 

Most of the buildings, about 65 percent, offer both short- and long-term care. Because of consumer preferences, Genesis, like other providers, is careful to separate the long-term care residents from the short-stay patients in the combination or hybrid buildings. 

Separate entrances and common areas, such as dining venues, are created for each group. “Short-stay patients want to be with people like them,” says Rohrbaugh.

Genesis has also developed a new brand called PowerBack Rehabilitation centers, designed only for short-term stays. “Patients are there about 14 to 16 days,” says Rohrbaugh. Eight PowerBack centers are open, and several others are under way. 

PowerBack centers, some of which are being developed by Mainstreet, feature about 124 private rooms and provide clinical specialties in orthopedic, pulmonary and cardiac care. 

Genesis offers what it calls a “1-2-4 Promise,” a guarantee that a new patient is assessed within one hour, meets with a therapist within two hours, and sees the doctor within four hours. “We begin caring for someone immediately so we can get them home quicker,” says Rohrbaugh. “This is especially appealing to payers.” 

The PowerBack centers are built near other Genesis properties so patients who can’t go home after rehabilitation can be housed at a nearby long-term care property. The PowerBack center in Vorhees, N.J., for instance, is within three miles of two other Genesis properties. 

 

Long-term care challenge

Genesis has also adjusted its approach to the long-term care side of the business — one of the big challenges facing the industry. About 20 percent of the Genesis portfolio consists of buildings that only offer long-term care and have been positioned as “lifelong care centers,” a name being used internally until the company comes up with a specific brand for the product. 

A special program is offered for veterans, highlighting their service. Creating a relationship between staffers and residents is a priority. Large cards on display in the rooms showcase details about the resident. “We want caregivers to know something about the person,” says Rohrbaugh.

At the same time, special services are being added to boost margins and occupancies at the buildings that only offer long-term care, and at the hybrid buildings that provide both short- and long-term care. For example, a specialization in wound care was added at one building, while the dementia care program was expanded at another. 

But it can take a year or longer to bring in new specialties, such as cardiac or pulmonary care, since it usually requires new staff, procedures and oversight. “It’s not just a marketing tool,” says Rohrbaugh. “You have to provide a good service.”

The facilities that survive will specialize in certain services and be able to manage the frail elderly with chronic conditions who are difficult to treat, says Tumlinson, the industry consultant. “Someone has to take the tough cases. That’s where the opportunities will be.”

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