ProMedica-ManorCare Deal Could Signal ‘Titanic Shift’ in Skilled Nursing

Welltower Inc. (NYSE: WELL) and ProMedica’s megadeal to acquire Quality Care Properties’ real estate has given the skilled nursing industry a boost, and could spur other similar deals in the future.

As part of the $4.4 billion joint venture, non-profit hospital system ProMedica also picked up the struggling skilled nursing chain HCR ManorCare, QCP’s former primary tenant. The deal takes ProMedica from a regional health system to a major player in the post-acute space with 160 skilled nursing facilities and 58 assisted living and memory care properties.

The transaction could transform the skilled nursing industry, which has seen major players such as Genesis Healthcare (NYSE: GEN) and Signature HealthCARE go through restructuring amid industry challenges.

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“People are getting a little more bullish and are expecting more health system deals in the future,” Ben Firestone, senior managing director at partner at Blueprint Healthcare Real Estate Advisors, said in an interview with Skilled Nursing News. “I think it’s going to take a while, but [the health systems] have a cost of care model that makes sense to partner with nursing homes again.”

The interest from health systems makes sense, as payment reform has shifted the government reimbursement model from fee-for-service to value-based care. Providers are shifting their focus to control the total cost of care across the continuum rather than at individual sites. This transformation has set up long-term care providers to be strong partners based on their ability to deliver quality care at a low cost.

“I don’t think long-term care has had much respect from the acute care providers in the past,” said Brian Cloch, chairman at Attuned Care, a long-term care provider. “We do a lot for a little. They can’t imagine how we can run a quality facility for Medicaid custodial rate.”

Despite the deal just closing, Tom DeRosa, chief executive of Welltower, said the real estate investment trust (REIT) has started to field calls from other health systems about working together.

“They understand the power that ProMedica will now have with HCR ManorCare, having both a post-acute care as well as an assisted living — focused on memory care — business,” DeRosa said on a call with investors last month. “These are challenges for health systems.”

But based on the size of the transaction, it’s unlikely that another major deal with Welltower happens quickly.

“It’s unlikely going to happen this year; they need to digest it as it’s a fairly big acquisition,” said Jonathan Hughes, an analyst with Raymond James & Associates, during an interview with SNN.

The industry seems fairly bullish on the deal for Welltower, but there is some concern for the future of ProMedica as a result of the transaction. Last week, Standard & Poor’s and Moody’s warned that the deal may lead to a credit downgrade by the end of the summer.

“We note a downgrade of more than one notch is possible, given the significant additional debt and cash usage to fund the acquisition,” said S&P.

ProMedica’s standalone acquisition of ManorCare was funded with $470 million in cash and a $1.15 billion bridge loan from Barclays, according to the rating agency. One of the biggest questions that remains for ProMedica is how it capitalizes on the ManorCare assets where it doesn’t have a physical presence.

Hughes said he expects ProMedica will look to acquire hospital assets that fit neatly within the ManorCare portfolio, particularly in areas where it doesn’t have a major presence.

“With the move into post-acute and home health, ProMedica is shifting towards an integrated health care model across the entire continuum of care, similar to the highly successful Kaiser Permanente model,” Hughes wrote in a research note.

If ProMedica can pull off the integration of the two companies and prove the model works, it could be a game-changing deal for skilled nursing and health systems overall.

“In order for organizations that take partial or full risk for total cost of care to control costs and provide quality outcomes, they will have no choice but to utilize strategic relationships with post-acute providers,” Cloch said. “We are in the middle of this titanic shift. It’s going to be interesting.”

Written by John Yedinak

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