Formation Chairman: New Models for Skilled Nursing are Emerging

Formation Capital has a long history in skilled nursing and based on our conversation with Arnold Whitman — its founder and chairman — the company continues to see a big opportunity for the industry to take advantage of the shift to value-based care.

During the National Investment Centers for Seniors Housing & Care (NIC) conference in Chicago last month, we sat down with Whitman to ask him about the current state of skilled nursing — and why he’s optimistic about the future.

Below are excerpts of our conversation, edited for length and clarity.


What’s your take on the current state of skilled nursing?

I think we’re at a very interesting time, so my feeling about skilled nursing is fairly diversified, because [the skilled nursing industry] is diversified in terms of the different geographical and model-types that are available.

In the short term, I think we will see continued pressure on occupancy. We’re living in a world [where], unfortunately, driving stability has been primarily focused on cost. So, how do we cut costs to make things work, because we’re losing revenue on our length of stay and therefore occupancy?


I think there is an unusual dynamic that exists in the marketplace today, and I would’ve thought we would have seen further deterioration in the value of skilled nursing assets. However, there really hasn’t been. In fact, I think the market for selling assets in skilled nursing is fairly decent and stable.

Why don’t you think it has gotten worse?

There seems to be constituencies of purchasers, especially the larger operators.

I think they look at [the facilities] and say, “We can do a better job operating these than they can.” And a lot of that, I believe, is from a cost perspective. And I think the belief, which I don’t think is necessarily wrong, is that a local operator has a better chance of being [successful] than a large chain operator. I think the challenges and the opportunities sort of go hand in hand.

The challenges of having cuts to length of stay and pricing for larger companies has forced them to cut costs, which in turn, I think, leads to a more difficult time of delivering the quality of care that’s really necessary.

I’m a big believer in quality, and the quality of care drives good economic outcomes. We’re in this sort of marketplace where, in the last couple of years, it’s hard to keep the quality level up while you’re cutting costs. Especially when staffing tends to be one of those big numbers.

I think staffing and clinical support is a real potential problem, especially in the economy that we’re in today. You’re going to have to train people to do things differently, embrace different types of technologies, and these aren’t easy things to do.

I do believe my experience in this business for over 30 years, we go through waves where everything is about cost, and then we go through waves where everything is about quality, and you really need both. Quality of care to me is suffering today at the hand of the need for people to cut cost, especially at again some of the larger companies.

I think a lot of people look at [facilities to acquire] and go, “Oh, I can come in here and run this thing. I can lower the cost here. I can do this cheaper.” Yeah, but can you deliver the quality of care? I really don’t think today there’s enough emphasis from CMS to incentivize quality. There’s lots of penalties, but I actually think there should be more incentives.

Don’t they try to do that with star ratings, to incentivize providers to provide better care?

I think that’s accurate that they use them to motivate [providers].

Whatever the dynamic might be, I think there are ways for smaller operators to see opportunity in what has become problematic for larger companies.

But the valuations that they’re paying for those facilities isn’t cheap. The point I’m making is that when you look at price-per-bed kind of valuation, even multiples, people are paying up for the opportunity.

Yeah. It doesn’t really make sense.

To me, there’s some friction in that dynamic that doesn’t quite add up. I shouldn’t say that. It adds up, because you’ve got demand for opportunity in what should be a distressed market. In my mind, the valuations are significantly distressed.

There are always exceptions, and in one situation where an [operator] can’t make any money on a facility and will sell at a low price, somebody is going to come in and figure out how to make $500 million in that center doing something different.

So, there are distressed situations that I think people can take advantage of, but I see a marketplace out there where people seem to be buying and paying up for skilled nursing centers at a reasonable rate, with the belief that they can do a better job.

So, are you a seller right now?

It depends on the situations, but I am also a long-term optimist when it comes to skilled nursing.

Why are you an optimist?

The shift [to value-based care] is happening within skilled nursing. Now when does it manifest itself into value-based value? I still think you’re two years away.

I think some people will be successful before that, and I think the industry itself will couple itself with some real demographic penetration that people have been waiting for.

It’s interesting you say that, because some people think that the demographic wave’s going to help skilled nursing, but there are other people that think it’s BS. 

You know, I think they’re both right.

But that population is going to grow, so I believe the demographics are going to have an impact. But it’s only if we start changing how we deliver care and what we deliver.

I can see the emergence of new models of care inside skilled nursing. The [shift to value-based care] will change the delivery of services that will take place. We will deliver services to a more chronically ill population with more complex care needs. The industry will need a higher clinical quality of staffing and the ability to start to look at opportunities around alternative settings for people in the full healthcare delivery system.

Why not have the ability to deliver some types of emergency room treatments inside the walls of a skilled nursing home? Why not have the ability to treat people with certain types of conditions? — whatever those chronic illnesses might be, obviously the need for changing the clinical model, exists as well. But I see this idea of creating units or programs inside skilled nursing that will be an alternative setting, as we also move from not just post-acute but pre-acute.

What do you think of the ProMedica/HCR ManorCare deal? Do you think that’s a kind of the start of the shift at work?

I think it’s an attempt at it and that’ll be an interesting one to watch.

Conceptually, I think it’s the right direction, but I don’t know enough about all of the inner workings of all of the pieces. It seems like there are a lot of assets in a lot of different places. I wonder how does that all play into the health system itself.

I give them a lot of credit for looking at it. You’ve got ProMedica coming in and willing to be able to take a risk on their population, and have the ability to care for people in the most appropriate setting for the dollars at risk that they’re going to have.

Last question: What’s your outlook for Formation in skilled nursing?

For the last three years, the wind has been right, smack in my face, with regard to skilled nursing. We own big companies. It’s pressure in our face, but I see there’s beginning to be a little bit of light. That says, there’s an opportunity [in skilled nursing] again.

Written by John Yedinak

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