Call it a Goldilocks problem. In the consolidating senior housing and care sector, providers are challenged to achieve the right scale—not too big, not too small, but just right.
Integration problems have plagued Brookdale Senior Living (NYSE: BKD) since its mega-acquisition of Emeritus Corp. was finalized in 2014, leading some to pronounce that the company is too large, at more than 1,100 communities. On the other hand, small and standalone operations may not have the resources to compete in a marketplace with increasing complexities and costs, including the need to have the latest technologies and amenities.
While a definitive answer may not be possible, the sweet spot currently may lie in the 50- to 120-property range, at least for companies with a strong emphasis on memory support and post-acute care. At this size, an operator can enjoy efficiencies of scale, achieve the sway needed in the evolving U.S. health care system, and maintain quality, according to two industry leaders.
Competitive vs. Unwieldy
Anthem Memory Care has been growing since its founding in 2008 and is aiming for a 25- to 50-property portfolio, according to Mark Rockwell, a principal with the privately held provider based in Lake Oswego, Oregon. Rockwell spoke Tuesday on the earnings call for LTC Properties Inc. (NYSE: LTC); the REIT owns five of Anthem’s six communities, and also is the owner for three in development. In addition, Anthem is taking over the operations of two Kansas facilities acquired by LTC just last week.
Attracting, training, and retaining quality staff is a top priority, particularly given the specialized needs of memory care residents. In fact, the No. 1 focus for this year is designing a program, including a bonus payment structure, to achieve these workforce goals, Rockwell said. A company with only a handful of properties won’t be maximizing the possibilities in such a model, he believes.
“I think there is an advantage to having multiple properties, certainly, and in large part due to the whole concept of bringing [the] training and care model to its fullest potential—which, if you only have…one, two, three properties, that’s pretty difficult to achieve,” he said.
At the current size of about 10 communities, Anthem is experiencing some growing pains in terms of the need for additional corporate staff versus the associated costs—but he believes that this will change as the company hits the 15- to 20-property mark, and then in particular as it expands from there to its target size.
“We would certainly feel as though, given a goal of 25 to 50 properties … that will really be effective for us, [as] we will be big enough to be able to afford all of the professional staffing at the home office that we need for recruiting, for training, clinical care, et cetera,” he said.
Anthem is carving out an identity as a niche player in freestanding memory care, Rockwell acknowledges, and that is informing growth plans and projections for ideal size. But when a senior care company grows to about 100 properties, “it’s going to become pretty unwieldy,” he said.
Considering the increasing need for memory care as the population ages, a provider with a care model that has proven successful will have ample capital to expand, noted LTC Properties’ CEO Wendy Simpson.
“When we were talking about Anthem and starting to build memory care properties, and we were so impressed with their focus on the care [for which] they already developed a prototype…I told Mark, there is going to come a time in your development, if this happens, when people are going to be throwing money at you like crazy,” Simpson said.
While capital may not be an issue, other factors—including the potential for oversupply in certain markets—demand a disciplined growth trajectory. Anthem divides major metro areas into smaller quadrants in order to gauge the feasibility of new development, then has a third party also conduct a review before the company moves forward with a project, Rockwell explained. Long-term success will come not from simply gaining scale, but targeting the right areas for Anthem to enter to establish its brand and maximize its competitiveness.
“We certainly don’t see the need to be huge in order to be highly competitive,” he said.
After a period of reconfiguration, in which it disposed of some properties and acquired others, Louisville-based Prestige Healthcare has determined that 90 to 120 facilities is the ideal size for a company with its business model, principal Craig Flashner, M.D., said on the LTC earnings call. Privately held Prestige offers post-acute care, assisted living, independent living, and other services at 68 facilities in seven states; 22 of its properties are owned by LTC.
Given Prestige’s significant Medicare-reimbursed post-acute business, the company recognized the importance of building referral streams from accountable care organizations (ACOs) and other new, more coordinated provider systems that came into existence as a result of the Affordable Care Act passing in 2010, Flashner said. Starting in 2012, the company embarked on an effort to become more strategic in its geographic footprint, which meant selling some facilities and acquiring others in its target region.
“So right now, if you leave our office in Louisville, Kentucky, and you drive north to Ohio and into the middle portion of Michigan, you can’t drive within 90 minutes without being at one of our facilities,” he said. “We have thirty 35 facilities in southern Michigan and we cover all the way from eastern part of the state to the western part of the state, and we have 19 facilities in Ohio.”
The tight geographic focus has enabled Prestige to be the provider of choice for the ACOs and other types of managed care organizations in its key markets, Flashner said. It has done so in large part by focusing on high-acuity patients—Prestige now owns 65% of skilled nursing ventilator beds in Michigan. The high-acuity focus gives the company power to negotiate, because an increasing emphasis on cost control incentivizes hospitals to move patients to lower-cost settings as soon as possible.
Knowing that it costs the managed care company, say, $2,200 per day to keep a vent patient in a hospital bed, Flashner can offer to transition the patient to a Prestige facility for $1,000 a day.
“It gives us pricing power,” Flashner said.
Of course, this patient referral stream only will continue if Prestige can deliver quality outcomes as well as lower costs, and this hinges on having the right clinical staff and a robust compliance department—another reason why it could be critical to keep a company from becoming too diffuse and hard to oversee.
“We have a very large compliance department in our company now that didn’t even exist years ago,” Flashner said. “We have a chief compliance officer, we have another compliance officer. We do triple checks before we bill.”
A company that is between 90 and 120 facilities can marshal the needed manpower and resources to ensure compliance and quality while building up the necessary relationships with the most important managed care entities in its markets—but also can have enough geographic diversity to hedge its bets in the event that one market tanks, Flashner said. In fact, this particular scale makes so much sense that even behemoths in the industry such as Kindred Healthcare (NYSE: KND), with a market cap of about $1.2 billion, have divested assets to bring their skilled nursing/post-acute portfolios down to around this size, he noted.
While the Kindreds of the world may be realizing there’s risk in being too large and diffuse, being too small also puts a company in jeopardy. Having a certain scale is needed to work with referral sources that cover a relatively wide patient base, and this spells doom for mom-and-pops, Flashner argued.
“I think mom-and-pops are gone,” he said. “You will not be able to be in a network if you … have two buildings. I just don’t think that a hospital system that’s bundling [payments] or a managed care company is going to want to go through the brain damage of contract with somebody that can only supply such a specific net.”
Written by Tim Mullaney