Finding Hidden Benefits of Scale in the Skilled Nursing Industry

The recent bankruptcies of the HCR ManorCare and Orianna skilled nursing chains seemed to validate an industry-wide opinion that the future belongs to the smaller, regional operator. But there are still advantages to scale in the skilled nursing industry — even if they remain under the radar.

The Ensign Group (NASDAQ: ENSG) has a nationwide network of facilities, but control rests largely in the hands of local operators and employees, giving the provider a unique advantage, according to a key landlord.

“They don’t put their name on anything,” CareTrust REIT (Nasdaq: CTRE) chief operating officer Dave Sedgwick said during a panel discussion at the National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in Dallas last week. “They don’t brand [as] Ensign Group. Many of the staff at the facilities don’t know the term Ensign Group. It’s that local of an approach to it.”

The Mission Viejo, Calif.-based Ensign accounted for 92 of CareTrust’s 185 long-term care and senior housing properties as of December 31, 2017.

It’s that hybrid model — combining streamlined back office operations and better bargaining power with local control — that sets a company like Ensign apart from chains like ManorCare and Genesis, Sedgwick said.

For instance, Ensign gives its executive directors wide latitude to make decisions — such as switching pharmacy providers or exploring innovative partnerships with other care providers in the area — without having to run them up the corporate flagpole. At other national chains such as ManorCare, Sedgwick said, the structure is more “top-down, puppet-string pulling.”

“I think they have a much harder time in that structure attracting great talent,” he said. “Because who wants to go to a facility where I’m just getting my arms pulled left and right all the time?”

Taking a page from hospitality

Long-term care operators might need to look to the hotel industry for guidance, according to the panelists.

Kurt Read, principal at the Dallas investment firm RSF Partners, said the hotel and hospitality space was highly fragmented when he first started investing in the space in 1990. Over time, large, national chains began to form and thrive by offering consistent service, leading up to the point where two huge players — Starwood and Marriott — became one in 2016.

While the industries are different, Read said the example shows that skilled nursing providers need to come up with innovative ways to achieve the kind of leverage that comes with a certain level of scale.

“What can you to together — legally — to create leverage?” Read said, suggesting partnerships between regulators, payors, and operators. “You should be doing that right now. Look at Ensign, look at some of these great examples of the way that targeted scale is bringing leverage to their business.”

Still, he acknowledged the road blocks that come along with creating large-scale SNF chains.

“The business has been insulated from that natural development of an industry over time to consolidate. It’s highly regulated. Assets are small. Each market is different,” Read said.

But scale doesn’t just have to mean one operating company with hundreds of locations. It can also just mean developing those boots-on-the-ground partnerships with hospitals and other senior housing properties within a geographic area.

“A SNF can’t run an ALF,” Sedgwick said. “A hospital can’t run a SNF.”

And the answer to creating those kinds of partnerships? Data.

Sedgwick shared the example of a single-site operator that CareTrust had recently evaluated. The owner had a single building near Chicago’s O’Hare International Airport, but managed to become a key referral partner among area hospitals by providing clear, consistent data that illustrated the facility’s solid outcomes.

“The data is what’s earning his market share, even though he’s a one-off in a tough, competitive market like Chicago,” Sedgwick said.

Written by Alex Spanko