How Hospital System Woes, Strategic Shifts are Reshaping Senior Living

Hospital systems across the United States are pursuing strategy shifts that are starting to reshape senior living market dynamics and suggest new operating models.

Health system ProMedica shed nearly all of its skilled nursing facilities while holding onto its private-pay memory care portfolio, in a recently announced deal involving Welltower (NYSE: WELL). 

And about two weeks ago, Sanford Health and Fairview Health announced their intention to join forces. The move would bring two large senior living nonprofits — the Evangelical Lutheran Good Samaritan Society and Ebenezer — under a single parent organization.

In this week’s exclusive, members-only SHN+ Update, I analyze this recent news and other health system moves and offer key takeaways, including:

• Senior living communities are gaining luster for hospital systems while skilled nursing struggles
• Hospital systems will accelerate the boom in active adult communities and senior living co-ops
• Hospital system strategies will drive the adoption of virtual care models within senior living communities

Hospitals’ financial woes

Hospitals are beset by many of the same problems that senior living providers are facing, notably staffing shortages and cost inflation.

Kaufman Hall has projected that 2022 will be the worst financial year for hospitals since the onset of Covid-19. The firm’s optimistic prediction is a 37% decline in operating margins compared with pre-pandemic levels.

“Brace yourselves—our pessimistic projections show margins falling off a cliff with a possible 133% decline,” wrote Kaufman Hall Managing Director and Chair Kenneth Kaufman, in September. “And a growing number of hospitals are feeling the pain: More than half of all hospitals are projected to experience negative margins this year, up from 36% in 2021.”

Low-margin, labor-intensive skilled nursing facilities are contributing to these problems for some hospital systems, with ProMedica being a notable case.

With insufficient staffing preventing SNF admissions, nursing homes were the primary driver behind a $229.3 million loss for ProMedica’s senior care division in the first half of 2022. 

Now, ProMedica is surrendering its 15% interest in 147 SNFs, which Welltower is transitioning into a new joint venture with Integra Health. And ProMedica is paying a substantial price for divesting these assets, providing operating reserves that could total more than $100 million, according to Fitch analyst Kevin Holloran.

Clearly, jettisoning skilled nursing was an urgent matter for ProMedica — but the health system has a very different perspective on private-pay senior living. ProMedica held onto 58 Arden Courts senior living communities, with high hopes for their performance in the coming years.

Pre-pandemic, the senior living assets were generating a high-30% margin on mid-80% occupancy, Welltower CEO Shankh Mitra noted on the REIT’s Q3 2022 earnings call. He “ventured a guess” that the senior living assets will have the highest margins of all ProMedica’s businesses, once they regain occupancy lost during the pandemic.

ProMedica is not the only health system that is backing off skilled nursing, with leaders reconsidering the composition of senior living and care portfolios. The Evangelical Lutheran Good Samaritan Society — part of Sanford Health — closed 10 buildings between January 2022 and October 2022, primarily in rural markets.

“Where we have a huge hospital presence, where we have a lot of density within our own organization, we have more influence,” Good Sam CEO Nate Schema told Skilled Nursing News last month. “We’re absolutely looking at where does the future lie within the Good Samaritan Society and where do we continue to grow our mission.”

Driving the co-op, active adult boom

When Welltower first entered its JV with ProMedica, leaders with the organizations expected a steady referral stream from ProMedica hospitals into the JV’s skilled nursing facilities. 

This “has not played out,” Mitra said on the Q3 earnings call. It is difficult to discern the role that Covid-19 played versus a lack of execution from ProMedica, he said. Certainly, staffing shortages are preventing SNFs around the country from taking on new admissions, creating a backlog of patients stuck in hospital beds.

But the value proposition for lower-acuity senior living communities is different; for this population, health systems have an opportunity to provide resources and care to prevent hospitalizations from occurring, furthering value-based care goals — particularly if many residents are enrolled in Medicare Advantage plans or other value-based arrangements tied to the health system.

So, I anticipate health systems will add more fuel to the red-hot market for active adult and similar communities.

Consider the potential Sanford-Fairview combination. Fairview’s senior housing arm — Ebenezer — this year launched a new co-op brand called Estoria Cooperatives, with an active development pipeline. Already, Ebenezer provides management services for more than 60 co-ops for older adults.

In terms of amenities and level of autonomy, the co-op model is similar to active adult, albeit with residents in an ownership rather than rental model.

It’s easy to imagine how Fairview and Sanford might work together to further grow the co-op pipeline and create a package of services tailored for co-op residents. After all, accelerating population health and value-based care is one goal that Sanford and Fairview have for their combination, with innovations “to ensure every patient receives the best care no matter where they live,” Sanford CEO and President Bill Gassen said in a press release.

And other health systems are formulating similar strategies. Trinity Health, for example, has been eyeing an active adult expansion for years, and this is a growth area that Jan Hamilton-Crawford highlighted when she became CEO of Trinity Health Senior Communities in May 2022.

The future of active adult lies in closer integration with hospital systems and other health care providers, Clover Group Founder Michael Joseph said this month on SHN+ TALKS. Clover has worked with Welltower on such efforts, tying its “independent living light” model with health systems such as Geisinger.

“The healthier a tenant is, the healthier a person is, the better they are to whatever health care provider, or insurer is providing to them,” Joseph said. “We have a mutual goal of keeping our tenant as healthy as we could.”

The rise of virtual care

As health systems invest more in lower-acuity senior living and provide services to promote residents’ wellbeing, they will try take virtual care models to new heights. Health systems are already looking to leverage technology to provide more convenient, timely and sophisticated services and care coordination. 

Sanford Health in 2021 launched a $350 million virtual care initiative, and this year broke ground on a 60,000-square-foot “virtual care center.”

The space will be a training ground in virtual care for medical students, residents and nurses, and will include “clinician workspaces equipped with telemedicine and digital health technology and feature services that include on-demand virtual primary, behavioral health and urgent care,” HealthLeaders reported.

Heading into 2023, one of Good Sam’s top goals is “really looking at how we best leverage that virtual care center as part of our integrated health system,” Schema told SNN.

Similarly, Trinity’s Hamilton-Crawford spoke about a better blend of “tech and touch” for senior living residents.

“Someone living in an independent living apartment should be able to push a button and say, ‘I need a doctor, I need to see a nurse today,’” she told SHN. “I see all of these services being looped together not necessarily in the building, but certainly readily accessible for anyone.”

Lifespark — which is pursuing a more integrated and value-based model of senior housing and care, recently gained a minority investor in Blue Cross, and works closely with health systems and insurers — also is leaning on technology as a means of meeting residents where they live. Earlier this year, Lifespark added Matt Nyquist as chief population health officer; in his previous role at Optum, Nyquist oversaw the technology division of a $2 billion population health business, and helped lead efforts to combine digital and in-person care.

If health systems build out their senior living divisions and effectively integrate virtual care, they could create new benchmarks for technology and care integration that other senior living operators will need to meet.

At the least, senior living providers must recognize the pressures that health systems are facing and consider how this could reshape dynamics in the markets where they operate, whether through new opportunities for health system partnerships, chances to solve for gaps in skilled care, or increasing competition in the lower-acuity segment of the industry.