Short-Term Rehab Push Leads to Oversupply in Some Markets

New development in the skilled nursing world has increasingly taken the form of short-term rehabilitation centers, where providers see an opportunity to capture a higher share of the shrinking Medicare pool amid Medicaid and Medicare Advantage pressures.

But in certain markets, that strategy may not be a recipe for success.

In fact, in some states in the Midwest and Southwest, the short-term land rush has resulted in overbuilding, according to the 2019 Healthcare & Senior Housing Commercial Real Estate Trends Report from Integra Realty Resources (IRR).

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“Deregulated states have seen new construction in transitional rehab centers that are geared toward short-term rehab,” IRR wrote in its report. “In some cities, there has been overbuilding and intense competition. Some of these areas have seen multiple buildings constructed, and the latecomers may never even open as a skilled nursing facility.”

Interest in short-term rehab

The nursing home sector is not adding significant numbers of new beds, and occupancy has been driven down by competition from assisted living, home health, and hospice providers, the report noted. In addition, pressure on SNFs to shorten the length of stay for rehab care is increasing as managed care use grows and even traditional payers move toward value-based models, IRR observed.

In the face of such industry pressures, several innovative players in the skilled nursing space have seen opportunity in the short-term rehabilitation space, including in the last few months. Ignite Medical Resorts, based in Niles, Ill., is expanding its “medical resort” model focused on medically complex patients with “rapid rehabilitation” in Missouri and Wisconsin. In California, Plum Healthcare Group is building a new SNF in Walnut Creek that focuses on short-term, high-acuity rehab.

In fact, National Health Investors (NYSE: NHI), went so far as to describe its investment in a new 144-bed facility near Milwaukee for operators Ignite Medical Resorts and Villa Healthcare as “a home run” because it allows the operators to create an environment for medically complex residents from the ground up. That’s an especially potent consideration given that the Patient-Driven Payment Model taking effect in October of this year will make patient acuity a major driver of reimbursement.

Market variability

But in certain markets, the short-term rehab center may not be as strong an investment. Specifically, states that are deregulated — those without certificate of need (CON) laws restricting new construction — are likely to see more of this asset class, Bradley Schopp, managing director at Integra Realty Resources’ Healthcare & Senior Housing group, told SNN.

IRR specifically pointed to Indiana, Arizona and Texas, with an activity period stretching roughly from 2014 and 2017, Schopp said. In Arizona, the cities of Tucson and Phoenix both had short-term rehab centers that were doing well until competition came into the market; now some of the centers might end up going to alternate uses, he told SNN.

For Indiana, the presence of Mainstreet and its “Rapid Recovery Centers” is a major factor in the number of short-term facilities there, Schopp said. Texas, meanwhile, is known for intense competition in certain markets and for relatively low barriers to new construction.

Mainstreet had planned, incidentally, to expand its Rapid Recovery Centers in Arizona and Texas, but pulled out of Arizona entirely. In addition, the operations of four rehab-focused facilities developed by Mainstreet in Texas were recently sold to a former company executive.

The crucial factor for short-term rehab isn’t just a shiny new physical plant, even though that’s a major part of the appeal for developers.

“I think the winner in a lot of the buildings is about the relationships,” Schopp told SNN. “The bricks and the sticks are great and fabulous, but it’s really going to be about the relationships.”

NHI’s Michelle Kelly emphasized that aspect of short-term rehab in a January interview about her firm’s home-run Milwaukee investment.

“I don’t think you’re going to see of us do all kinds of new [skilled nursing] development. Ignite is a group that we want to grow with,” she said. “We’re not going to go do [new development] with everybody. And we’re not going to do a ton of this. It’ll still be very opportunistic.”

The referral relationships are essential, since patient volume is key to making a short-term rehab model work. And complicating that need is the fact that overall patient volume is declining, with more hospitals pushing patients to the home and community, Donna Sroczynski, the president of operations at Chicago-based Symphony Post Acute Network, told SNN last year.

But operators and investors still have clear paths when targeting the clinically complex patients that PDPM encourages them to take, particularly in facilities that were built more recently, Schopp noted. In addition, the issues with short-term rehab in deregulated markets don’t extend to all markets, he added — so a short-term facility outside of Arizona, Indiana, or Texas could end up providing a significant return.

“If you’re in the right market, if you have a group of facilities where there’s a lot of Medicare demand and you can bring in a nice new facility, you have a great shot,” Schopp said.