‘Big Enough to Matter’: Finding the Sweet Spot of Skilled Nursing Scale

If there’s been one overarching philosophy in skilled nursing over the past year, it’s been the rise of regional: the idea that major chains aren’t nimble and and flexible enough to weather the regulatory changes and financial pressures that have gripped SNFs.

It’s a theory that has been borne out by reality: Kindred Healthcare (NYSE: KND) has exited the business entirely, while ongoing players like HCR ManorCare and Genesis Healthcare (NYSE: GEN) continue to struggle as real estate investment trust (REIT) landlords find ways to reduce their exposure to any one provider.

But defining the exact size of skilled nursing scale has been difficult, and there remain some benefits to being big in the skilled nursing and greater post-acute care space.


“I think size matters a ton in relevance,” Rich Tinsley, president and CEO of health care mergers and acquisition advisory firm Stoneridge Partners, said during a Tuesday panel discussion at the Post Acute 360 conference in National Harbor, Md. “If you don’t have a certain size in the market, you’re not relevant, and it makes a big differences. And if you’re big enough, you still have to be good and have all the other pieces.”

Part of the relevance that comes from size includes the ability to navigate Medicare Advantage plans, whose occasionally labyrinthian paperwork demands make participation by individual SNFs or smaller chains more difficult. But size also works to the plans’ advantage, according to Bain Capital managing director of private equity Devin O’Reilly.

“In order to be relevant to large payer organizations, I do think you need to have some geographic diversity, and so in order to do some of the more complex risk-sharing, partnering, etc., you have to be big enough to matter,” O’Reilly said. “And so you could be be very big in a particular geography, or you could have a few markets that are relevant to a particular payer.”


Jim Pieri, portfolio manager at BlueMountain Capital Management — which entered into a joint venture to purchase Kindred’s skilled nursing assets last year — contrasted the need for scale in SNFs to the senior living industry, which he characterized as the least likely to be affected by consolidation.

“It’s a local game, and it’s about the quality of the physical plant, the quality of the location,” Pieri said of senior housing. “Most importantly the quality of the people there, and the services.”

By contrast, the more highly fragmented home health and hospice industry is ripe for consolidation, in Pieri’s view, with the potential for expense savings that come with shared internal services.

That leaves SNFs somewhere in the middle, with the regional operators that have “next-gen” operating models swooping in to take over from the struggling major chains.

Even as Pieri predicted that skilled nursing and other operators will eventually return to consolidation mode over time, he pointed out the ways in which the mega-chains have created today’s current strained landscape.

“The top eight to 10 guys are getting smaller. They all got too big, and they’re getting levered, and the people who work there are not engaged,” Pieri said. “Their insurance costs are too high, and the buildings are neglected. And they don’t coordinate anything. They’re getting pushed into the regional guys, and the regional guys are getting bigger.”

Written by Alex Spanko

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