Good morning, ProviderNation. An increasing number of analysts are worried that long term care, once considered one of the healthiest and most stable investments, is headed for a slump.
The reason is basic, short-term demographics, but the implications are long-term and messy.
“No one in the industry publicly likes to pan what’s going on, but privately, there’s a lot of concern about the upcoming supply, and it’s mostly in assisted living and memory care,” says Steve Monroe, the veteran managing editor at Irving Levin Associates. “There’s also a lot of concern about the prices of transactions and the amount of supply.”
The Demographic Dip
Between 1925 and 1945, America had its lowest birth rates in history. That’s exactly the generation that’s aging into long term care now.
“Most people will tell you that there’s going to be a four- to five-year lull here,” says Phil Fogg, president and chief executive officer of Marquis Cos. in Milwaukie, Ore., who quickly adds: “However, then you’ll see the top of that boomer curve and demand will dramatically increase.”
Not even the most bearish analyst doubts that seniors housing is, at every level, a great long-term investment. But one of the difficulties of the moment is that many investors have jumped into the sector for short-term gain. That kind of thing can only boost shares of Pepto Bismol.
High Price, Low Occupancy
“Here’s what’s going on, and these are really paradoxical forces,” says Irving Stackpole, veteran analyst who runs his own consulting firm. “You’ve got the market—the actual, quantifiable market—and in many areas, the age- and income-qualified numbers of customers are either stable or declining. Meanwhile, there’s money on the sidelines—cash; huge amounts of cash—that’s leaking out at the seams, looking for an investment.
“And for those investors, anything that looks like senior care and real estate is an absolute no-brainer,” he says. “They absolutely rush after it with the cash falling out of their pockets.”
That, in turn, has driven up prices, at just the moment where demand is dropping. “We have situations where the per-unit price is astronomical,” Stackpole tells me. “At the same time, we have occupancy and other metrics of fiscal health that are falling.”
Quietly, some of the nation’s largest providers have been shelving long term care projects to wait out the coming slump.
Any market is subject to the odd ailment; but yet another difficulty for providers and investors is that their traditional cure—skilled nursing—is subject to its own fever, this time in the form of that classic Washington malady, regulatory uncertainty.
“We don’t know what our revenue models are going to be in five years. We really don’t,” Fogg says. “And I don’t think the markets have fully priced these models because nobody knows what the episodic payment model will look like and/or who will control the Medicare dollars in the future.”
As you read this, for instance, the fine folks at AHCA/NCAL are furiously lobbying regulators to include functionality into their quality metrics. If regulators ignore them, every skilled nursing provider could see their rehab reimbursement collapse almost overnight.
“Many skilled nursing providers are making significant investments in the quality of their physical environments, technology, care management, and their ability to manage pay-for-performance outcomes. It is a cost of staying competitive in the sector. And yet, we have no certainty on what we’re going to be paid,” Fogg says. “And that’s what’s creating all this chaos.”
Indeed, just last year, Extendicare, one of the nation’s largest providers, quit America altogether, citing regulatory uncertainty.
For Marquis’ Fogg, providers (and investors) will have to be patient. They’re also going to have to be proactive.
“When that revenue model changes, you want to make sure you can survive. Organizations will want to have strong liquidity on their balance sheet and not be over-leveraged in order to have a high-risk tolerance for this uncertain time,” he says.
Perhaps most important, though, is to start the top, Fogg says.
“You better have the right leadership team. You better have strong leaders who can lead through a transformation like no other time before,” he says. “I see the next five years as a period of time where we get all the inefficiencies out of post-acute care. And I see that happening quickly.”