Perfectly the Wrong Size: The Case For and Against Downsizing in Skilled Nursing

The clock is ticking on the long-term care sector.

Whether an operator is part of a larger organization, a continuing care retirement community (CRCC), or a standalone facility, industry headwinds are pushing leaders across the country to think more closely about what moving to private rooms would look like for their organization.

For many that conversation involves downsizing.

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Illinois-based Pearl Healthcare, for example, recently purchased two facilities and plans to increase the number of private suites at both through a multimillion dollar renovation project that will include moving down in bed counts.

“We think that as the population is aging, we feel that there’s definitely increased competition with aesthetics and what type of environment people are trying to rehabilitate in,” Pearl CEO Eitan Zeffren told Skilled Nursing News. “That’s a return on investment that we feel pretty confident with in terms of putting up that initial investment and then seeing the benefits of that in the long term.”

For other, smaller operators, it can be a little trickier to make the numbers work.

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Matt Kinsinger, executive director of Highland Oaks – a 52-bed facility outside of Chicago – said he’d like to and probably should move to private rooms, but the issue is “scalability.”

“If we had a 140-bed facility, we’d figure out how to make it work, but with us, we have a total of 29 distinct rooms, so taking it down to the existing footprint would be 29 beds and the issue we have with that is overhead,” he told SNN.

Dana Wollschlager, a partner with Plante Moran Living Forward, along with Ed Slack, another Plante Moran partner that specializes in health care, have worked closely with skilled nursing operators rebounding from the pandemic to help them better understand market dynamics and develop a strategy to refill their buildings.

Part of the problem Wollschlager sees with the sector currently is that SNF utilization may never again reach pre-pandemic levels.

“I think some people are kidding themselves that this was a result of the last few years. This trend was happening way before Covid came in … We’ve been overbedding for a long time,” Slack told SNN.

Making it work scalability-wise

Pearl Healthcare started in 2018 and with six facilities now in its network, Zeffren thinks there is a real opportunity for smaller, more hands-on operators to better overcome some of the challenges and regulatory changes that all operators now face.

“As a small organization, I thought it was really an opportunity to be able to enter the space and be nimble and agile as things come our way,” he said. “As a regional operator you have that ability to maintain efficiency across your facilities and cater to each facility’s needs differently.”

Zeffren thinks that for some of the national providers and skilled nursing giants that have been “selling off” parts of their portfolios, it has become more difficult for them to operate with that same hands-on approach.

“It’s become clear over the years and over the expansion of some of the larger companies that it’s not a cookie cutter business, you can’t operate every facility the same way in each market,” he said.

One way Pearl Healthcare has looked to position its new facilities better moving forward is through renovation.

“We look for facilities that are currently going through some performance challenges but have tremendous opportunity and upside for growth to reinvent themselves,” Zeffren said.

At the two former Symphony Care Network facilities Pearl Healthcare acquired in May, Zeffren is looking to put in additional clinical programming to cater to the complex needs of the patients as well as the planned multimillion dollar capital investment to help bring them “up to speed” with the other competitors in the market.

Zeffren said he’s committed to putting the work in to build these facilities up.

“It’s really kind of on us as the operators right now to make those investments for the future of the facility,” he added. “We find it very worthwhile in these cases.”

Kinsinger has a harder time making the numbers work financially.

Just because the resident population would essentially be cut in half in a switch to private rooms, doesn’t mean that expenses could be halved as well, he explained.

“We can’t get rid of half the overhead. For instance, the housekeeping budget wouldn’t go down, it would still be 29 rooms,” he said.

The private room model will be an ongoing discussion for Highland Oaks moving forward, but Kinsinger thinks it’s a difficult time for standalone homes to determine how to make it work without driving up costs.

Kinsinger thinks it’s the “right model,” it’s just not affordable, especially in Illinois.

“At 50 beds, there’s too much cost that isn’t scalable,” Kinsinger added. “I think there’s still a question in my mind whether or not we can survive long-term in the current building with the current model. I don’t think we know the answer to that yet.”

Seniors migrating away from SNFs

While the number of people 65 and older in the United States has expanded from just over 41 million in 2011 to just under 55 million by 2020, nursing home utilization has failed to follow the same trajectory.

In fact, despite the population growth, the number of nursing home residents has actually decreased during that time — 1,370,680 residents in 2011 compared to 1,290,177 in 2020 — resulting in an overall decline in SNF utilization by 29% nationally, according to data from Plante Moran.

As older adults continue to shift away from nursing homes in favor of other growing options like home and community based services, most of the work Wollschlager is doing now is helping organizations best rightsize their operations.

The nursing home sector lost 10,144 beds overall in 2021, according to a Plante Moran report using NIC MAP data.

Specialty investment bank Ziegler has also seen a similar trend in the CCRC space. Many providers are downsizing their nursing beds, often with conversions to semi-private to private rooms in mind, with some providers ultimately electing to exit the service line entirely.

A number of newly developed communities in recent years are being built with independent living and assisted living only, Lisa McCracken, director of senior living research and development for the firm, noted in a report released last month.

“Most facilities haven’t rebounded to pre-pandemic census and so then the question is what the right number of beds is,” Wollschlager explained. “We’re working with a client right now where they’ve got 580 beds of skilled nursing and we plan to cut that in half. The next question is, what do you do with these buildings and can they be repositioned? Some can, some can’t.”

Wollschlager has worked with clients all over the country to better understand what their total number of SNF beds needs are because it “isn’t what they have right now.”

“Almost every market is overbought,” she added.

One thing Wollschlager looks for when making a market analysis is to see what can be accretive to the organization in an attempt to spread those fixed costs out and come up with a game plan to help them survive long-term.

“It’s trying to understand the consumer preferences, the market dynamics and what the right number of skilled nursing beds are,” she said. “And also recognizing that we are continuing to see new assisted living and memory care products come online which is a preferred option over skilled nursing.”

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