There's a demographic shift underway as it relates to health care. Aging Baby Boomers are driving the demand for special services such as senior housing, assisted living, independent living and skilled nursing, and in turn we're seeing increased consolidation in the industry.
The Differences in Care
The use of these services depends on the acuity of the patients and the level of assistance needed for daily living. Independent living facilities are typically for elderly who can live relatively independent with few medical issues. An assisted living facility is typically designed for elderly who are no longer able to live safely on their own yet do not need the high-touch services provided by skilled nursing. They provide assistance with medications and the activities of daily living. A skilled nursing facility offers around the clock care for high acuity cases.
Within the skilled nursing realm there are really two different entities:
We are seeing some mounting margin pressures for the operating companies, led by nominal reimbursement rate increases and managing the costs of running a business (labor costs are typically the largest). Technology is also becoming a big driver in the senior living space. As hospitals are being penalized for readmission rates, they're going back to the senior living administrators for statistics and data around quality measures. This is creating an investment need in technology for many operating companies. Conversely, real estate fundamentals and prices in this market are very strong. Firms are looking to invest dollars so we're seeing a strong flow of money into senior living.
Independent living is what most would consider the over 55 communities. This means that places like New York City and North New Jersey are going to be more expensive than Kentucky and Minnesota, for example. Assisted living can also be more expensive in the northeast corridor, than, say the Midwest. Quality of care is important. With skilled nursing you're being put in a facility where the quality of care metrics and facility capabilities are the most important decision drivers.
Consolidation in the Sector
Although it's an active sector, skilled nursing is also a very fragmented market. Historically, it's a space where there were many mom and pop shops that operated two or three facilities. Due to the combination of margin pressure, regulatory burden and technology investments, we're starting to see more consolidation in the sector which I think will continue.
A number of companies service the entire post-acute care spectrum.
Kindred Healthcare is a good example of a firm taking this position. They have long-term acute care, in-patient rehab, assisted living and skilled and home health facilities. If somebody works through the acuity spectrum, Kindred can handle it via this cluster strategy.
You also have companies who just want to play in the skilled nursing space. It really depends on where firms believe their particular expertise lies. Each one of these businesses is very different, although they are adjacent markets. But just because you're good at skilled nursing doesn't mean you'll be good at home health.
I see growth in this sector lasting for quite a while. With more patients needing care, there's plenty of construction occurring. Some of the assisted living facilities and independent living facilities being built now even look like high-end hotels that are aimed directly at the boomer generation who are used to living in very nice facilities.
The better operators are the consolidators because they understand readmission/re-hospitalization penalties. If somebody is discharged from the hospital to a skilled nursing facility but end up back in the hospital, the hospital's going to be penalized. In the end, hospitals are searching for skilled nursing facility partners that have good quality metrics and the data to support it. Companies that have strong clinical outcomes and have invested in the technology to differentiate themselves have the ability to grow their business through an acquisition.
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