Data show skilled nursing facilities need to reinvent themselves
Skilled nursing operators who think that “holding pat” is the best way to operate their businesses for the long term, should think again. Data show that a dramatic shift is under way for the sector. Those who don’t plan for this change now, may see their margins continue to erode.
Challenges facing skilled nursing
It’s no secret that many skilled nursing operators are struggling. Many facilities are operating on thin margins in the face of inadequate Medicaid reimbursement, declining private-pay census, and negative general public perception. In addition, it’s getting harder to attract and retain staff and most facilities are outdated, (30+ years old). It is clear that the industry needs to reinvigorate its brand. But change requires investment; many operators think they cannot afford to invest or feel it is too risky to invest. As a result, many feel it best to just hold the line.
From the industry’s point of view, we cannot afford to let that happen. Data from the National Investment Center for the Seniors Housing & Care Industry’s Market Area Profiles™ (NIC MAP) show that there are significant challenges developing for the sector. They suggest that the ability of skilled nursing to reinvent itself will be critical to its survival. First, data has shown that the number of occupied units (the number of residents) is currently decreasing at a rate of 1% per year for skilled nursing. In contrast, demand for independent living, assisted living, and dementia care is growing faster than the annual growth rate in 75+ households, which was 1.8% over the past several years. Independent living demand (the number of residents) is growing annually by 6.5%, assisted living by 3.4%, and dementia care by 8.5%. Equally disheartening, nursing care is losing inventory at a rate of 1.4% per year change in inventory, while inventory for the other three sectors is growing (see table 1, p. 50). Ironically, this comes at a time when the seniors housing industry is facing unprecedented demand due to demographics and acceptability. It is quite alarming that the skilled nursing industry is reducing inventory now.
Type of Facility*
* IL=Independent Living
This table shows the dramatic shift of market share occurring in our industry. While nursing care still holds the dominant position in the industry, it is rapidly losing market share to IL, AL, and DEM properties. The NC industry is faced with declining inventory at a time when the industry is facing unprecedented demand (demographics and acceptability). Nursing care is also losing private paying residents at an alarming rate. These prospective residents are often choosing AL/DEM in lieu of a skilled nursing facility. At this pace, IL will be the dominant provider of seniors housing within the next 12 years. Credit: NIC MAP.
Net Change in Inventory
Change in Units/Beds
Market Share (3Q07)
Market Share (3Q22)
Using NIC MAP data to project future inventory by sector supports the dramatic shift taking place. While nursing care currently holds the dominant position in the industry insofar as inventory, it is rapidly losing market share to independent living, assisted living, and dementia care. In the third quarter of 2007, nursing care comprised 54.9% of all seniors housing and care units. This compared to 24.3% for independent living, 17.2% for assisted living, and 3.5% for dementia care. If current supply trends hold, the market share of nursing care will dwindle to 34.4% by 2022…a -22.6% net change in inventory. In fact, within the next 12 years, independent living is projected to become the dominant choice for seniors housing and care (see table 2, p. 52).
The above table shows that usage of private-pay seniors housing is growing at a rate faster than both the rate at which private-pay seniors housing units are being built and faster than the rate at which demongraphics (75+ households) are growing. *75+ households is the common demographic seniors housing companies use in their analysis of potential customers. Credit: NIC MAP.
Private-pay mix is also declining. Since 2004, the mix of private residents in nursing homes has fallen by 21% to 16.1%. This translates to approximately $13 million in lost daily revenue or more than $4.7 billion per year. Prospective residents are often moving to assisted living or dementia care in lieu of skilled nursing.
One thing is for sure, in order to survive, the skilled nursing facility of tomorrow will not be the nursing home of today. The sector is changing. And operators need to respond now.
What smart operators are doing
In light of this data, what strategies can skilled nursing operators employ to reinvent their facilities and prepare for the future?
One option is to reallocate beds from skilled nursing to subacute care. This allows operators to target the shorter-stay rehab resident referred to them by hospital discharge planners and paid for by Medicare. Of course, the facility will experience more turnover, but it will also realize a much higher revenue-per-patient day. NIC MAP estimates the number of dedicated short-term or subacute units to be roughly 3% of the skilled nursing inventory.
The second direction is to try to attract the private-pay resident by offering a very upscale, almost country club-like setting. Along with a top-notch product, high-end, hotel-type services would also need to be offered. Of course, this involves learning the hospitality side of the business.
Third, operators can choose to “right-size” their facilities by building new or renovating into a smaller skilled nursing facility and downsizing to the number of beds they think the market can support. This may provide the opportunity to add assisted living, independent living, or dementia care via a wing or campus expansion. Operators pursuing this model are realizing major benefits. By offering multiple levels of service and care, they can target a broader market and keep prospective residents longer. Evidence also shows that admissions may occur between skilled nursing and assisted living.
NIC MAP data have shown that combination properties are able to achieve higher occupancies and generate more revenue than freestanding ones. Currently, less than a tenth of nursing home operators offer multiple levels of care. But the majority of private-pay seniors housing offers two or more levels of service, such as independent living/assisted living, assisted living/dementia care, etc. These independent living combo properties average $554 more revenue per occupied (REVPOR) unit per month than freestanding properties. Assisted living combo properties average $482 more.
How to get capital
Whether operators choose to retrofit, upgrade, or expand their facilities, they are going to need capital. But in today’s market, that’s not going to be easy. “Money for new construction and renovation is very difficult to find right now,” says Andy Stokes, vice president of marketing and strategic planning for LTC Properties, Inc., a publicly traded real estate investment trust (REIT). “The economy is suffering and credit markets are suffering. And when the banking system cuts back, it cuts back on construction first.” So what are operators to do? Stokes advises nurturing any good relationship they may have with a bank, because most will try to take care of their existing customers. Operators should also look into agency financing through Fannie Mae, Freddie Mac, and HUD, which should continue to be available. They may also try to access equity financing sources such as REITs. Many are well financed and have cash to invest.
“An operator of a facility has tremendous advantages because he or she has a lot of local knowledge in an industry that’s extremely local,” Stokes adds, “such as, what are my competitors doing and how can I keep up with them or get ahead? They can use that knowledge when planning to meet with those who provide financing. If they go to their bank or a REIT and have a good plan, they’ll get a hearing.” Over the past year, those from LTC Properties have made it a point to meet with their own customers on such plans. “We’ve talked to them about their facilities and which ones had expansion capabilities in terms of the campus and needs within their markets,” says Stokes. “But even the ones who have relatively newer and combination properties need to be investing in technology. There are communications and energy technologies that are being introduced with increasing success, especially in skilled nursing facilities. And those require money that goes into the building or new equipment.”
There are several options operators can consider implementing to respond to the changing shifts in the marketplace. Each has its own merits and which direction to take may not be necessarily clear. But one thing is certain: With the exception of a few skilled nursing facilities in particular markets that have little to no competition, staying put with the current business model will eventually put many operators out of business. n
Michael Hargrave is Vice-President of NIC MAP. Founded in 1991, the National Investment Center for the Seniors Housing & Care Industry is a nonprofit organization providing information about business strategy and capital formation for the senior living industry. Proceeds from its annual conference—the next one being September 10 through 12, 2008, in Chicago—are used to fund research and data that lead to informed investment decisions to advance the seniors housing and care industry.
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