In a Regional Era, ProMedica and Welltower Go National with QCP, ManorCare

The refrain from the top leaders in the skilled nursing space has been that the industry is a regional game: Control a limited number of high-quality facilities in a confined area, the thinking goes, and an operator can win by successfully embedding itself in the local reimbursement and regulatory landscape.

Late Wednesday night, two of the largest players in the health care and real estate investment trust (REIT) landscapes announced that they’d made a $2 billion bet on the opposite play.

Woven throughout ProMedica and Welltower’s (NYSE:WELL) presentations on their blockbuster deal is the idea that bigger is better in the long-term care space, and that only through scale will providers and landlords win the future.

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“Individuals in their 70s and 80s are the fastest-growing segment of the U.S. population, yet the current senior care environment is fragmented, costly, and inefficient,” ProMedica observed in its press release trumpeting the deal. “Nearly eight million patients are using post-acute care services, presenting a significant opportunity to coordinate those services with healthcare systems to improve quality and reduce the overall cost of care.”

In his pre-written quote, Welltower CEO Tom DeRosa talks up the potential of shifting patients into lower-cost settings by partnering with hospital systems, a frequent refrain in the industry — but one that usually stops at merely collaborative partnerships, not an all-out acquisition.

“This acquisition will enable ProMedica to expand their service offering beyond acute care hospitals to include home health, post-acute care, and residential memory care,” DeRosa notes, framing the new ProMedica as a kind of one-stop-shop for elder care needs.

At first blush, the hospital operator and the REIT appear to be doing the same thing as Genesis HealthCare (NYSE:GEN), ManorCare, and countless other large nursing chains and expecting a different result. But the players swear that it’s different, pointing to the backing of a top-tier hospital network, and in a skilled nursing era that’s begging for transformative change, it’s hard not to buy into the concept.

“If you’re going to look at this as a SNF deal, you’re missing the whole underpinning of why we’re doing this,” DeRosa told Skilled Nursing News on Thursday, echoing a sentiment he emphasized repeatedly on a call with investors earlier in the day. “We would never have bought this real estate from QCP except in a joint venture, as we’ve structured it, with an A-rated health system that will be our operating partner as well as our real estate partner.”

At industry conferences and in the trade press, skilled nursing operators and investors fret constantly about the rise of managed Medicare plans, the rapidly narrowing footprint of SNFs that hospitals deem fit for their patients, and overall shifts in the reimbursement market.

As the government continues to tinker with the ways providers receive Medicare and Medicaid payments, with an increasing focus on cost- and risk-sharing, it certainly makes sense for a hospital network to want to control the entire process from start to finish. After all, if a hospital’s reimbursements will depend on how well a patient recovers in skilled nursing and home care, why wouldn’t that hospital want to have its own staff in place at every step of the way — instead of trusting its dollars to a third party that operates in an industry with significant risk?

Perhaps Shankh Mitra, Welltower’s senior vice president of investments, was a little grandiose when he described the deal as “a first-of-its kind transformational transaction that will define the future of this space.”

But his assertion that smart operators and landlords can meld the advantages of national scale and local concentration into a potentially winning formula isn’t a stretch; it’s something the operators of The Ensign Group (Nasdaq: ENSG) have proven out in reality.

“We do not believe there is any general rule that a national operator is better than local, [or] vice versa,” Mitra said. “You need local scale. If a national operator has local scale in a market, they do very well.”

It’s clear that the future of skilled nursing doesn’t involve standing still, and the players in this week’s blockbuster deal have signaled that they’re ready to back up the talk about industry transformation with cold, hard cash.

Written by Alex Spanko

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