Conditions Are Ripe For Industry Consolidation As Nursing Homes Emerge From Pandemic

The nursing home industry has been through the wringer over the past 24 months, first with the implementation of a new Medicare payment model, the Patient-Driven Payment Model (PDPM), and then the COVID-19 pandemic.

Coming out of the pandemic, operators across the country need to start thinking about their future in the post-acute care continuum.

The effects of the COVID-19 pandemic — including occupancy rates dipping to 68.5% — could serve as the final straw for some operators and there is a growing expectation that this will accelerate facility sales and feed a trend toward regional consolidation and health system partnerships for the nursing home industry.

“Occupancy rates aren’t going to sit at 70% forever, the question is though, what will that new normal look like, what’s the profitability level at that new normal,” Andre Maksimow, senior vice president at Kaufman Hall, told SNN. “I think our point of view is that new profitability level and that new normal is only going to be for those folks that specialize or have regional scale, and have a more value-based orientation that they can be a meaningful partner to health systems and other folks in need.”

The Skokie-based investment firm released a report of the 2020 mergers and acquisitions in the health care industry and predicted that there will be significant growth in partnerships among and between other health care verticals coming out of COVID.

Maksimow thinks that nursing home operators need to take a deep dive into the data and figure out what their strengths are and whether or not they have the wherewithal to survive in the marketplace.

“What they need to do is they probably need to think about consolidating,” he said. “You’re going to be a consolidator or you’re going to be consolidated.”

Expectations rise for regional consolidation

Maksimow thinks SNFs need to think creatively and strategically about what they want to be moving forward.

“If you look at the numbers, the demographics, the use rates … the overall utilization per capita of skilled nursing has been going down systematically for the last 10 years, the increase in the number of [older] people is not going to make up for that,” he said.

He thinks right now is a good opportunity for operators to start thinking about acquiring other facilities in their area and decide how they want to be a better part of their health system and a more meaningful player in that environment as a whole.

But working more closely with health systems is not an easy proposition. A health system might have 50,000 discharges a year, with only 5,000 going to skilled nursing.

“If you have a 20-bed facility … how can you really have a serious conversation with the health system to accommodate their needs?” Maksimow said.

One obvious solution is for skilled nursing providers to gain greater scale.

“We’re running a sales process right now for a couple of facilities that we’re selling, and I will tell you that I think that’s top of mind for all the sophisticated buyers we’re dealing with is trying to consolidate a region to create a network of care,” he said.

Now could be an ideal moment for creating these regional SNF footprints, as the decision to sell may not be all that difficult for some operators in light of COVID challenges, according to Juan Sanabria, analyst with BMO Capital Market, a member of BMO Financial Group (NYSE, TSX: BMO).

“I think there’s a fair amount of people who are just going to want to exit the business,” he said.

The long-term care industry is expected to lose $94 billion over a two-year period from 2020 to 2021, an analysis conducted by the American Health Care Association and National Center for Assisted Living earlier this year shows.

A total of 143 skilled nursing facilities shut their doors or combined with others in 2020, with 1,670 projected in 2021, ACHA reports.

Coming out of COVID, with the government support waning, Sanabria feels operators need to reassess what they want to do long-term.

“If you can get a good price, and by all accounts, pricing has held firm, you might be able to get out,” he said. “I do think there’ll be some element of consolidation among regional players because I do think you’re going to need to be more sophisticated.”

There’s strong interest in high-quality nursing homes, Maksimow confirmed.

“In the northeast, we’re seeing very interest for these assets,” he added.

Timeline uncertain

Despite some of the challenges COVID presented, market share statistics indicate that the industry is recovering, according to Trella Health research.

Trella Health, formerly known as Excel Health, analyzes Medicare Part A and B claims data for post-acute providers, including hospice, home health, and skilled nursing. Based on that data, the company determines which SNFs in a given market gained the most market share in a given time period.

The potential for regional consolidation depends on where Centers for Medicare & Medicaid Services (CMS) and Medicare Advantage (MA) plans land on how to handle SNFs, however, said Carter Bakkum, senior data analyst on health care insights with Trella Health.

“Any industry decline normally indicates consolidation is imminent since the only obvious opportunity for growth is company acquisition,” Bakkum explained. “So, the consistent decline in SNF admissions before the pandemic could indicate SNF consolidation is coming, though it is difficult to put a timeline to it.”

Based on Trella’s market share data for Q3 2020, no clear winners had yet emerged, which only four provider companies having top-3 rankings in more than three states: Genesis HealthCare (10 states), Life Care Centers of America (4 states), Sanford Health (4 states) and Trilogy Health Services (4 states). Those are all large companies with multi-state footprints, but smaller providers also were posting market share gains in the quarter.

“This could indicate that SNFs, large or small, were on relatively equal footing during this period,” according to a Trella analysis of the data.

Bakkum feels that 2020 fourth-quarter numbers, as well as 2021 in general, could define who the real winners in the SNF industry are.

“Pent-up demand could bring a veritable flood of patients requiring skilled nursing care which could shake up current market share leaders,” he said. “This year is pivotal for SNFs to establish themselves as strong businesses.”

The third quarter for many skilled nursing facilities proved to be all about survival, Bakkum added.

“The fact is that almost 40% of the market share growers in Q3 saw a decrease in admissions between 2020 Q1 and 2020 Q3,” he explained. “However, 2020 Q4 may hold a brighter future as patients become more accustomed to the new normal and pent-up demand from postponed elective procedures may have provided a large opportunity for SNFs to grow not only from 2020 Q3 levels but from 2019 Q4 levels.”

The third quarter 2020 skilled nursing market showed that it was a rebuilding time for many SNFs.

“Q2 admission counts [in 2020] were lower year-over-year and quarter-over-quarter for almost all SNFs — but increases in 2020 Q3, even slight ones, indicates that the industry is recovering,” the Trella Health report states.

The speed and strength of that recovery remains to be seen, and could determine the pace and scope of industry consolidation as the pandemic recedes.