By Bobby Guy
Senior housing has recovered from The Great Recession to become the new darling of developers across the country. Sale prices for senior housing facilities have skyrocketed, and cap rates on deals appear to be reaching historic levels.
At the same time, the market is changing dramatically. The Affordable Care Act (the “ACA”) has significant long-term implications for post-acute providers. In addition, outside of the select facilities that accept only private payment, reimbursement uncertainty is high across the industry, and the traditional model of the local Medicaid-reimbursed single facility appears to be swiftly disappearing.
The co-existence of high sales prices and operational uncertainty – two seemingly contradictory market conditions – presents a unique opportunity for owners and operators in the senior housing space. What are key strategies for surviving and thriving in the evolving market?
Positioning for the New Acuity Reality. The key to understanding the ACA is the “Acuity Principle” – more care for more people without rationing healthcare or bankrupting the country is all about efficiency, and it means there is strong pressure to move services from high-acuity settings (“HAS”) to low-acuity settings (“LAS”).
While there will always be a need for high-acuity providers, current trends indicate that they will be serving a much smaller group of patients and for a much shorter period of time. Reimbursement changes under the ACA will continue to drive patients and services down to LAS. As patients move through the continuum quicker and sicker than they did in the past, providers at each level will have to demonstrate that they can deliver services efficiently without patients experiencing negative outcomes (i.e., going back to HAS).
The clearest example of this dynamic is the current penalty that hospitals face for certain readmissions. The penalty risk has caused hospitals to become deeply interested in how skilled nursing facilities are ensuring that their residents do not experience avoidable readmissions. This is why, in the context of avoiding hospital readmissions, skilled nursing is becoming the setting of choice for rehabilitation services (an LAS opportunity). The growing area of bundled payments will only increase this downward pressure on the continuum. It is essential that providers understand how they fit into this new reality and more importantly, how they communicate to other providers why they should be the provider of choice.
Internal Controls. Reimbursement is a difficult business, and it is only getting harder. There is slippage in many billing departments, especially in times of reimbursement change. Providers should take the opportunity to perform regular department reviews and training — at a minimum, on a quarterly basis to ensure that all claims are submitted before submission deadlines.
This may seem obvious, but in practice, it is too often the exception instead of the rule. Improving collection time is found money, because it saves financing costs for working capital. Providers should appropriately challenge questionable denials, and consider strategies for pursuing lost revenue. Indeed, in the acute space, a hospital provider obtained a nine-figure judgment against a billing software company in 2014 for billing errors and losses.
Alternative Capital Structures. Assuming that the swelling senior demographic means there will always be more demand for seniors housing is a little bit like the argument for private armies in Africa – there may be a huge need, but it doesn’t translate into demand unless there is money to pay for it. The senior demographic is significantly underserved in the low- and middle-income brackets.
Tax credit assisted living provides a prime economic opportunity to develop facilities where demand will be high, and properly structured, tax credit projects can be built with little or no initial equity capital (the tax credits provide the equity). In addition, non-profit providers often have difficulty moving quickly to seize acquisition and development opportunities because of tax laws. Some of the major investment banks are backing structures that involve for-profit affiliates of non-profit entities. For example, one of the bidders earlier this year at the final round of a high profile, $60 million purchase of three CCRC’s in Texas was a non-profit using a for-profit acquisition affiliate backed by the financial strength of a Wall Street investment bank.
Dollar-Cost Averaging. While multiples are high across the seniors housing industry, one place they remain lower is in the distressed arena. One reason may be that the lowest-cost acquisition capital in the seniors market is generally REIT funding, and REIT’s prefer stabilized assets rather than turnarounds. Acquiring facilities in distress creates the opportunity to buy at lower multiples in a high dollar market. For existing market players paying high multiples for new acquisitions (or concerned about being over-leveraged on existing facilities if reimbursement declines), distressed acquisitions create the opportunity to reduce overall leverage across a portfolio. For new entrants buying up-market facilities, distressed acquisitions create the opportunity to diversify risk with different multiples.
Lobbying Dollars. Studies show that the best return on investment dollars is often lobbying efforts. Surprised? In 2012, for example, a dollar invested in lobbying was likely to produce a return 30% higher than the S&P 500 on average. The reason major companies put valuable dollars into lobbying is not simply defensive – instead, lobbying pays back. Where major opportunities exist, providers should consider creating alliances to pursue common lobbying goals. Smaller providers unable to take on direct lobbying efforts should consider involvement in industry trade groups that provide common lobbying efforts.
Taking Money Off The Table. Sales and consolidation in senior housing are all the rage, and many long-time participants in the industry have decided the current environment is an excellent time to exit the business. But for the owners and operators wanting to stay in the market, the current environment presents a choice opportunity to right-size a portfolio and bank some capital, through the strategic sales of carefully selected assets, alignment with new capital providers, or the infusion of fresh equity investment.
Bobby Guy is an attorney specializing in senior housing opportunities, and a founding member of Polsinelli’s Nashville office. The author wishes to thank his colleagues Matthew Murer and Kara Friedman for their contributions to this article.