Diakonos, Leo Brown Mix Post-Acute with Private Pay at New $15M Skilled Nursing Facility

In an era of tight finances and legal caps on the number of beds, new skilled nursing developments are few and far between — with most of the action in recent years focused on higher-end, post-acute rehab facilities.

The Diakonos Group’s latest development, a $15 million skilled nursing facility in Tulsa, Okla. with a total of 102 units, will feature many of the luxury “medical resort” touches that have come to define the niche, but with a potentially unexpected twist: long-term care beds aimed at private-pay residents.

“We’ve got it pro forma’d up to include Medicaid, just in case, but I have full faith that our market will support 42 private long-term care beds in a new facility, without having to go to Medicaid,” Diakonos CEO Scott Pilgrim told Skilled Nursing News.

The Edmond, Okla.-based operator has 18 buildings in the state, with a mixture of skilled nursing facilities, assisted living properties, and group homes for adults with developmental disabilities. Depending on the specific location, the company typically sees a private-pay census of about 10%, Pilgrim said — primarily consisting of residents who may have otherwise paid to live in an assisted living-style property but require around-the-clock nursing care.

“Their acuity is progressing to the extent that the AL’s can’t provide the care that they need, but people are wanting an alternative to that 40-year-old cinderblock building, but need the skilled nursing level of care,” Pilgrim said.

CON opportunity

That lack of new construction in Oklahoma — in part driven by Certificate of Need (CON) laws — pushed Diakonos and its development partner, the Indianapolis-based Leo Brown Group, to pursue ground-up construction in the Tulsa marketplace.

“They have a pretty tough CON structure in the state, so there’s very little new development,” Bill Morton, vice president of development at Leo Brown, told SNN. “In this metro area, to our knowledge, there’s only been [three] new skilled nursing facilities in the last 20 years. The two newest will be about 10 years old when we open. Those facilities are north of 90% occupied.”

Some form of CON law is on the books in 38 states, according to a 2018 analysis by the National Conference of State Legislatures, with the general aim of preserving high-quality care by restricting the number of beds or properties in a specific market. The restrictions can work both ways for savvy operators and investors: While the caps on total bed counts prevent new construction, they also preserve a competitive advantage for operators that gain a foothold in the marketplace.

“CON laws do inhibit new building construction, but most importantly they protect the Medicaid residents within existing skilled nursing facilities. Without CON, the higher reimbursement patients get swept into pretty new buildings,” Pilgrim said. “This leaves the Medicaid recipients in existing facilities without adequate reimbursement to address physical plant and care needs. You can see this playing out in most every market in Texas.”

Leo Brown will continue to serve as landlord at the property — called the Cearu Medical Resort, after an old English word for “care” — once it opens sometime in the spring of 2020. Skilled nursing facilities remain outside the core of the firm’s development and investment business, which has been focused on private-pay senior housing and medical office buildings, though Leo Brown has also partnered with Ignite Medical Resorts to develop a new higher-end rehab SNF in McHenry, Ill., Morton said.

Internal referral pipeline

The Tulsa property’s 60 private rooms for post-acute residents will come with the kind of luxury touches that developers and operators have increasingly implemented to attract younger, healthier post-surgical patients — including private showers, a concierge, and spa facilities, according to a Tulsa World report on its recent groundbreaking.

Pilgrim envisions a pipeline forming between the two sides of the business going forward, as post-acute residents familiar with the creature comforts of the rehab side eventually look for longer-term options.

“There will be a portion of that population that can’t go home and have the level of the care that they need — nor can they go to assisted living,” Pilgrim said.

Private pay residents typically account for only a small portion of most providers’ populations, with Medicare covering post-hospital stays and Medicaid kicking in for long-term care once residents exhaust their private finances. But out-of-pocket payments can rival the Medicare mix in certain rural areas: In the third quarter of 2018, for instance, rural operators derived 14.7% of their reimbursements from private payers, according to the National Investment Center for Seniors Housing & Care (NIC), with 20.2% coming from Medicare.

For urban providers, that proportion is 21.4% to 6.7%, respectively, though a variety of industry players last year told SNN that providers shouldn’t ignore the stabilizing influence of private-pay residents in a nursing home. Compared with residents who rely on government payers and Medicare Advantage plans, collecting cash from private-pay patients is relatively easy, and could represent a higher per-day rate than Medicaid.

“People don’t really pay attention, honestly, because it is small,” Isaac Dole, founding and managing partner at the Chicago-based real estate investment firm Birchwood Healthcare Partners, told SNN at the time. “It’s small, but it’s also meaningful.”

Diakonos already has experience with private-pay residents in the Tulsa metro area, with Pilgrim pointing to its Franciscan Villa community in Broken Arrow, Okla. That property, licensed as a continuing care retirement community (CCRC), has a “healthy” population of both private-pay and Medicaid-eligible long-term care residents, Pilgrim said, along with Medicare-reimbursed rehab patients.

“People need that level of care, but they want it in a more pleasant environment,” he said.