Welltower’s Tom DeRosa discusses how the game-changing deal is taking real estate to the next level
In July 2018, a groundbreaking partnership provided further evidence of the industry’s quickly changing trajectory.
In a $4.4 billion deal, the big healthcare REIT Welltower and ProMedica, a large nonprofit healthcare system, formed an 80/20 partnership for the real estate linked to HCR ManorCare, the nation’s second largest post-acute long-term care provider. ProMedica purchased HCR ManorCare’s operations in a separate transaction.
The anniversary of the deal represents an opportune time to check in on the partnership’s progress. NIC recently spoke with Tom DeRosa, chairman and CEO at Welltower about the alliance of healthcare and housing, and what it means for the industry going forward.
Here’s a recap of the conversation:
NIC: Why was Welltower originally interested in forming a joint venture with nonprofit ProMedica to acquire HCR ManorCare?
DeRosa: The partnership demonstrates how a health system can further vertically integrate across the heatlhcare continuum. Prior to the joint venture, ProMedica was an acute care system with ambulatory care that also owned a payor, Paramount Health Care. As an insurance company, Paramount offers Medicare Advantage and managed Medicaid plans, and dental and vision plans. The acquisition of HCR ManorCare with Welltower more deeply vertically integrates ProMedica into post- acute care, rehab, skilled nursing, home health, hospice, memory care and assisted living. ProMedica is one of the best examples of a fully vertically integrated health and wellness delivery ecosystem. Welltower was excited to have a role to demonstrate the viability of our platform to facilitate a landmark healthcare transaction.
NIC: What is the status of the integration of ProMedica and HCR ManorCare?
DeRosa: The integration is multi-leveled and going quite well. One of the things we’ve seen is that ProMedica has done a very good job of assessing the talent pools at both ProMedica and HCR ManorCare and has chosen the best people to run respective functions. For example, ProMedica’s CFO Steve Cavanaugh had been CEO of HCR ManorCare. The acquirer has demonstrated that they will go with the best people. It’s not just “my way or the highway” which often derails business combinations.
NIC: Are the business systems integrated?
DeRosa: It’s still in process. ProMedica is vertically integrating as their business is evolving. This requires management to be very nimble because so much is changing as we speak. It’s hard to put a timeline on that. Welltower is evolving everyday too. Management has to be able to change direction based on where the market may go in the future.
NIC: Is HCR ManorCare now a nonprofit entity?
DeRosa: Yes, that was the first milestone after the closing. They have achieved a nonprofit status. It’s very beneficial to ProMedica from a financial standpoint but also beneficial in that there may be potential opportunities for ProMedica with HCR ManorCare to provide services to other health systems on the post-acute skilled nursing side. In certain cases, the fact that HCR ManorCare is a nonprofit makes them a preferred provider.
NIC: Does HCR ManorCare’s nonprofit status impact your ownership structure?
DeRosa: Not at all.
NIC: Are the financial results what you expected so far?
DeRosa: They’re on track. This is a long-term investment for us. We have a master lease with ProMedica for the properties.
NIC: Is the partnership driving meaningful integration that leads to better care and outcomes for seniors?
DeRosa: Definitely. I have two observations. ProMedica’s protocols from the acute care business are being shared with the post-acute skilled nursing and senior living businesses of HCR ManorCare. Also, ProMedica is probably the first major U.S. health system to have an operating and strategic focus on the social determinants of health. ProMedica CEO Randy Oostra has had a lot of foresight to build resources around that. I think this is a space where other health systems are playing catch up.
Experts say 80 percent of health, especially for seniors, is determined by factors other than healthcare, such as where you live, the broader environment, and socio-economic circumstances. ProMedica is improving outcomes by implementing successful strategies around these factors. Take the area of nutrition. When you’re dealing with a population of people being discharged from the hospital to skilled nursing, you’re trying to treat them in a lower cost setting to get them back into their home as soon as possible. They don’t need to be in a hospital bed, but they need a certain amount of rehabilitative care before their physicians believe they can be living independently again. One of the areas we know is so important to prevent that individual from bouncing back into the acute care system is food. A huge issue is food insecurity. It’s not always about having the money to buy food, but knowing how to eat well to control various health conditions.
For example, a hospital patient might be a type 2 diabetic, arthritic and have COPD. If the person is eating a high salt, high fat, high sugar diet, like many people in this country do, the diet is working against whatever benefit he or she may have received from the hospital stay. ProMedica understands this. They’ve done everything from working with individuals to understand how they can eat better to the fact that they were the first health system to introduce food pharmacies. Physicians can write prescriptions so patients can get fresh fruits and vegetables and higher quality proteins from a food pharmacy. That’s a game changer.
NIC: Can you comment on the importance of the physical structure of the building as a way to deliver improved outcomes?
DeRosa: A good example is HCR ManorCare’s Arden Courts business, which provides specialized memory care. These buildings are designed for people with memory impairments and that makes a difference. Research shows people who suffer from dementia are comfortable when they don’t run into dead ends, so the facilities are designed on a circular racetrack-type model. We know this helps to soothe an unquiet mind.
People are living longer, so there are more people suffering from memory loss. Hospitals today are unprepared for the influx of older patients with dementia. A health system with a competency in memory care like ProMedica has with HCR ManorCare will be better able to manage this population. It’s an example of a how to create a broader ecosystem of care.
NIC: Any lessons learned so far from the partnership?
DeRosa: Bringing three parties together has created an opportunity for innovation. Welltower has a skill set in residential care. We’ve combined that with ProMedica’s acute care system and HCR ManorCare’s post acute, home health, and hospice services to form a collaborative culture. That’s exciting. We’re looking at new ways to manage the aging population more effectively.
NIC: What is the size of the market opportunity with nonprofits?
DeRosa: There are hundreds of millions of dollars in real estate sitting on the balance sheets of nonprofits that was built under a very different fee-for-service model. The whole profitability structure of the nonprofit health system has changed over the last 10 years. These were double-digit margin businesses and today they are low single-digit margin businesses. Given all the places nonprofits need to invest in a more competitive market, the question is whether they have the ability to continue to control all that real estate. Some of it needs to be phased out. We have developed a strategy at Welltower around that thesis. The joint venture with ProMedica is a perfect example of how a real estate healthcare infrastructure platform like Welltower can help a nonprofit health system grow, and develop an advantage, in a much more competitive business going forward.
NIC: Will this be a driver for Welltower’s growth? If so, what kinds of partners will Welltower be seeking?
DeRosa: There will be many opportunities that come from the integration of residential care concepts and nonprofit healthcare systems. We’re very optimistic about how these types of joint ventures actually capture another layer of value for the senior living sector. For so long, values have been based on the real estate alone. But there is a growing recognition of the role real estate plays to drive lower costs and better outcomes in healthcare.
