Skilled-nursing properties nationwide have seen their occupancy fall during the first quarter, but that may drive more merger and acquisition activity in the sector, according to new research.
The National Investment Center for Seniors Housing and Care found that SNFs' occupancy rates dropped to 81.6% in the first quarter of 2018, down from 83.7% over the same period in 2017. Pressure from payers, accountable care organizations, managed care organizations and other groups to reduce length of stay has led to a decline in occupancy over the past several years, said Bill Kauffman, senior principal at NIC.
More care has been moving to outpatient settings and the home, which may cause more skilled-nursing operators to merge or sell their businesses, he said.
"The industry does have demographics in their favor for the long term, but I do think that you are going to see these expectations of a value-based industry continue," said Kauffman, adding that those that don't adapt will sell, merge or specialize operations. "Maybe you transition to more of a higher-acuity platform. You will have to prove your value, and you do that by having good data."
The number of Americans ages 65 and older rose from 35 million in 2000 to 49.2 million in 2016, according to U.S. Census Bureau population estimates. This shift is propelling sub-sectors such as pharmaceuticals, community health centers and home healthcare.
But the growing aging population has not translated to higher occupancy rates for inpatient facilities like skilled-nursing centers given the financial incentives directing care elsewhere and the preference to receive care at home.
Despite the low occupancy rates, skilled-nursing networks can still attract buyers due to the demographic trends, industry observers said.
"The same drivers that are leading to these drops in occupancy rates will lead to ancillary M&A within the SNF sector, whereas providers will continue a trend of acquiring ancillary providers of home health and hospice services that have significant overlap with their facilities," said Kevin Palamara, a managing director at Provident Healthcare Partners, a healthcare investment bank specializing in mergers and acquisitions advisory.
Ensign Group recently purchased Sun West Choice Healthcare and Rehabilitation, a 140-bed skilled-nursing facility in Sun City West, Arizona, while Griffin-American Healthcare REIT IV bought eight skilled-nursing facilities in Missouri for $88.2 million.
Unsurprisingly, attractive margins are the primary motivator behind healthcare acquisitions, according 32 of 100 senior healthcare executives surveyed in a report from consulting firm West Monroe Partners. But nearly a quarter said the aging population and overall growth in demand will make healthcare targets more attractive over the next three years.
"There is active interest from buyers, especially from private partnerships or private equity," Kauffman said. "I think from the perspective of capital flowing into the sector, it's a positive."
Managed Medicare revenue represents a growing share of skilled-nursing facility revenue mix, according to the NIC report. That trend is something to watch in the years to come, said Liz Liberman, NIC healthcare analyst.
"Reaching a six-year high of 10% of revenue mix, managed Medicare may make up some losses in Medicare but operators are still dealing with the rate differential compared to Medicare and may need to adapt to this increasingly influential payor source," she said in a statement.