Skilled Nursing: Opportunities in a Challenging Environment

The skilled nursing industry faces numerous risks in the current environment. However, all industries face their own risks, and the skilled nursing industry is no stranger to policy, reimbursement, or operational risk. Currently, the industry is undergoing a transformation and there will be more challenges ahead, but with transformation also brings opportunity.

It is almost certain that reimbursement pressure will persist, since continued downward pressure on per-person spending for Medicare and Medicaid is a reality given the aging demographics in the U.S. The baby boomer generation, a group of nearly 80 million, began turning 65 in 2011. It is a powerful force that will continue for a long period of time. In turn, part of the transformation underway is related to the policy risk the industry is facing with the drive to shift risk from the government to private managed care. This could place many skilled nursing operators at a competitive disadvantage. If you combine the competitive pressures from payors and alternative care settings with the challenging regulatory environment, the industry is in a unique period, to say the least.

However, in times of uncertainty and fear, investors who understand the challenges may also find unique opportunities to capitalize in that type of environment. Some of the bright spots and opportunities are as follows:

• Higher perceived risk can result in higher returns. Higher risk should equal higher reward —at least, that is what investment theory states. These risks, as outlined above, have been priced into skilled nursing properties, which trade at higher cap rates relative to other healthcare real estate. Cap rates for skilled nursing properties have traded within the 11–13% range for many years. 

• Some investors are starting to recognize the opportunity. Investors are beginning to price in the quality improvements and the shift to short-stay post-acute care that are transforming the skilled nursing industry.

• Investors are beginning to appreciate the ability of skilled nursing to lower healthcare costs, improve outcomes, and gain market share in a more integrated healthcare delivery system.

• Investments in the operations can be key to future success. In this time of uncertainty, investors value operators who are nimble, have a resident-focused culture, deliver quality outcomes, and are able to document and share the outcomes with partners and payors. These operators and investors have the opportunity to win.

In summary, operators and investors who want a chance to succeed in the future need a strategy of commitment and flexibility. You have to have a plan to survive the squeeze.