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 The Pathless Way: Providers Spread Their Wings

However much the big merger price tags may dazzle, the growth of long term and post-acute care has actually been steady and  stable.

 

 
In Ovid’s telling, the commoners of Crete saw Daedalus and Icarus spread their man-made wings and leap into the sky “with religious eyes/And strait concluded them Gods; since none, but they/Through their own azure skies could find a way.” Of course, even as he fled the awful labyrinth, old Daedalus knew better. Fastening those waxen wings “with trembling hands,” he warned his son:
 
To wing your course along the middle air;
If low, the surges wet your flagging plumes;
If high, the sun the melting wax consumes:
Steer between both: nor to the northern skies,
Nor south Orion turn your giddy eyes;
But follow me: let me before you lay
Rules for the flight, and mark the pathless way.
 
You know the rest of the story. Icarus, notoriously, flew too close the sun (oy, these kids of yesterday!) and plunged into the depths of the ocean. Ever since, everyone has had a handy parable about the rewards of hubris (and the importance of listening to dad).
 
But a lot of people forget another lesson in the Daedalus-Icarus tale: how courage, skill, and ingenuity allowed two mere mortals (as a much later poet, John Gillespie Magee, has it) to slip the surly bonds of earth and touch the face of God.

Cliff’s Edge

In much the same way, providers find themselves standing on the cliff’s edge. Everyone agrees that the business of caring for the frail elderly and the aging is ready to take off. The question is, what course shall providers take? Experts agree that long term and post-acute care is becoming a booming business. The last few years have seen stakes raised from millions to billions, the emergence of industry titans, and the steady disruption not just of the amount of business done, but the way it’s done, too.

That business looks promising can’t be denied. Consider:

 ■ About 8,000 Americans celebrate their 65th birthday every day. They’ve been turning 65 in those numbers every day since 2011; they’re going to continue to turn 65 every day for the next 18 years, according to AARP.
 ■ By 2030, nearly one out of every five Americans will be 65 or older, AARP says.
 ■ More than two-thirds of those aging Americans are expected to need some kind of long-term support or care in their lifetimes, AARP says.
 ■ Medicare reimbursement for post-acute care has grown by at least 5 percent per year and reached an aggregate $62 billion in 2012, according to the Centers for Medicare & Medicaid Services. That’s about one out of every six Medicare dollars.
 ■ In 2011, the transaction volume for all seniors housing reached $27 billion, say analysts at the National Investment Center for Seniors  Housing & Care (NIC). They expect that 2014 will have eclipsed that figure.
The sky, literally, is the limit.

‘It’s Happening All Over The Place’

“I don’t think we’ve ever had more opportunities,” says Christian Mason, president and chief executive officer of Lake Oswego, Ore.-based Senior Housing Management. “There’s a lot of growth there, still. It’s happening all over the place.”

Indeed, there’s mounting evidence that long term and post-acute care is becoming a global business
(see sidebar).

Mason is working toward a PhD in finance and has studied his sector extensively, especially real estate investment trusts (REITs), real estate companies with common stock. The nation’s REIT market is worth about $1 trillion, Mason estimates. Despite the frenetic pace of investments, mergers, and acquisitions in long term and post-acute care over the past decade or so (see sidebar, page 16), Mason estimates that the seniors housing REIT market could grow by another $40 billion in the near future.

And Mason may well be underestimating. In 2009, none of the top five largest REITs focused on seniors housing; today, three out of the top five do.

Beth Mace“When you look at the data, you can see that it’s really strong,” says Beth Burnham Mace, chief economist at NIC, in Annapolis, Md. “I think the sector has a lot of positive things going for it.”

Compelling Data

Indeed, Mace’s research finds that the third quarter of 2014 saw a seniors housing occupancy rate above 90 percent, with demand outpacing supply by a wide margin. Mace says she expects occupancy to continue to grow, and not just because of an aging population.

“I think the expanding national economy, rising consumer confidence, and aggregate high individual wealth are all positive numbers right now,” Mace says. “The U.S. economy is doing quite well. In my view, that should translate into good demand for seniors housing.”

Long term and post-acute care may long have been a good business. But it’s never been a big business. So veteran observers of the sector can be forgiven if, as they watch multibillion-dollar companies emerge (and merge with other multibillion-dollar companies), they feel a little like Ovid’s peasants, watching two mere mortals flap their wings to join the gods.
:##:

From Labyrinth To Airborne

But it’s not just the scope and scale of business that’s changing. Even small, rural companies are thinking bigger (if not big).

Many analysts say it’s an inevitable outcome not just of an aging population, but on the political and economic convergence around demands for low-cost, high-quality health care—demands more generically known as “value-based purchasing.”

“When you look at … a particular patient and you think you need to champion the triple goal of quality, improving patient engagement, and lowering cost,” says Donna Cameron, a former nursing home administrator, “the best opportunity for all of that to come together in a single episode comes in the post-acute care sector.

“There is going to have to be a continuum that is adaptable and flexible that will help people age in place in a healthy way, but also have services available if they need it,” says Cameron, who is now a managing director at Navigant Healthcare Consulting.

So what’s happening is that providers’ companies aren’t necessarily getting bigger—they’re also getting wider: offering a multitude of services beyond the traditional bed-count nursing home, Cameron and others say.

And, however much the big merger price tags may dazzle, the growth of long term and post-acute care has actually been steady and stable—around 5 percent per year for most REITs, Mason says.

Indeed, that steadiness is what is giving long term and post-acute care a new sheen of respectability, NIC’s Mace says.

Donna Cameron“Every property type has a story about when it became an ‘acceptable’ investment,” she says.

“Apartments, for a long time, were thought to be risky as an investment. Now it’s considered a core asset. And seniors housing is coming that way.”

Risks Remain

That doesn’t mean that providers should set their course for the sun.

“There are risks,” Mace says. “Some are totally unrelated to the sector. Interest rates, for example. A lot of the mergers we’re seeing are because interest rates are low. It could have an impact on the pricing of the deals. If interest rates go up, that means that cap rates could rise, and that could mean that valuation rises, which makes it more expensive to think about.”

Senior Housing Management’s Mason agrees that interest rates are a danger, but he thinks the sector’s real nemesis is its age-old one: regulatory uncertainty.

“As states go through this process of higher-acuity, community-based services, there are going to be a lot of changes that providers are going to have to work through,” Mason says.

“You also run the risk that everyone sees this as the next big thing, you run the risks of having markets that don’t have some kind of certificate of need becoming overbuilt.”

And that’s always the risk.

“These aren’t large-margin operations,” he says. “It’s really incumbent on providers to stay really full, and the successful ones do.

“But that also means that they’ll have to reinvest in their communities,” Mason says. “Because we’re seeing very different expectations among different age groups. Baby boomers don’t have the same expectations as their parents.”

The key to survive the pathless route, most analysts say, is to get out of the labyrinth, to not be hemmed in by the dogmas of the quiet past. Even small and scattered rural providers will have to offer diverse services, from remote telemedicine to hospice, experts say.

They’ll also have to heed their own Daedalus types: Don’t grow too big too fast, but don’t drag too close to the seeming safety of the old ways either, experts agree.

“We now, truly, all have to work together,” Mason says. “We’ve been able to live, up until now, in our own silos. That’s over.”

For many providers, all of this is still a big leap. But those who have the wit, the courage—and the discipline—to take that leap will find their pathless route across the sky, where, as Ovid observed, not even the cruelest tyrants can reach them. ■
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