Investments in the skilled nursing market have endured great turbulence the last five years. With so many different asset classes in the senior housing industry and the reimbursement climate in constant flux, investment specialists and operators alike have waited for a definitive answer on how to navigate within the marketplace. Now, as the dust has settled a pattern has become clear.

Mom and Pop’s Struggle in the Skilled Nursing Industry

In the last several years, Mom-n-pop shops, or single asset operators, have endured significant struggles in the skilled nursing sector. The majority have left or are considering exiting the skilled industry altogether. The main reason why they have been met with failure is simply because they are too small to compete with larger operators. Simply stated, they cannot win the lucrative contracts needed to keep their doors open, nor can they weather changes in reimbursement or large lawsuits.

Skilled nursing facilities differ from other retirement properties in that they are a contracted reimbursement model. Those in need of specialized care turn to skilled nursing facilities for proper medical attention around the clock. Generally, these seniors do not find these homes by themselves. They receive recommendations and placements from their healthcare providers.

How do these healthcare providers know what skilled nursing facility to recommend or place their patients in? They typically have contracts with specific operators and facilities at set rates.

For example, Kaiser Permanente is a nationally recognized medical provider serving hundreds of thousands of people. A substantial portion of their clients are senior citizens needing placement in different asset types in the senior housing industry, some of which will inevitably be for a skilled nursing facility.

Behind the scenes, Kaiser will need to find skilled nursing facilities that meet their standard. They will need to draft and negotiate contracts detailing services, benefits and payments structures. However, with all this work, it is unlikely that Kaiser will negotiate several contracts with smaller SNF operators. For the same amount of work, they can deal with just one large SNF operator who can offer 2,000 beds instead of 90. As a result, small SNF operators do not get the contracts with larger medical providers, and therefore lose out on clientele.

Furthermore, in the senior housing industry one bad lawsuit can destroy small operators. Without financial resources that the larger operators have, mom and pops find it difficult to fight back or settle. The odds are simply stacked too high against these one-to-two asset operators in the skilled nursing industry.

Mega Operators Have Their Own Issues

On the other side of the senior housing industry, large operators boast their presence. With nationally recognizable names and big payrolls, these operators employ hundreds, if not thousands, of specialists, nurses and managers. Unfortunately, by collecting too many facilities to operate, talent is spread thin, sometimes resulting in subpar performance.

Many larger operators have reached a point where they can no longer operate with effectiveness or efficiency. Particularly because these portfolios are spread throughout the US.  Every region requires its own compliance regulations, marketing styles and contract negotiation. However, with limited talent it is impossible for these operators and managers to deliver. So, while these mega operators win the big contracts necessary to fill beds, they may lack the manpower and resources to maintain the service quality if they are too large.

Midsize Operators Win Big in the Senior Housing Industry

Somewhere in the middle, midsize operators have struck gold. These are operators with 30 to 70 assets. This gives them enough power to negotiate and obtain profitable contracts yet remain small enough to operate effectively. Generally, these midsize operators are regional in nature.

This sweet spot has allowed the skilled nursing sector to remain standing, and may be the model operators need to follow to maintain maximum efficiency.

Services provided in SNF’s are necessary to the senior community. People will always need specialized care and residence. Despite the turbulence in the skilled nursing sector, doors need to stay open because demand remains high. So, what can operators do now? By either downsizing or accumulating other facilities, current operators that do not identify as midsize can make the changes necessary to be successful in the senior housing industry.

Restore Your Senior Housing Investment with the JCH Group

The JCH Group is a premier brokerage for the senior housing industry. We provide an array of services for buyers and sellers of all types and sizes. If you’re looking for help navigating the SNF market, we are your top resource.

Our investments specialists determine the strengths and weaknesses of your portfolio, and provide a plan that makes your senior housing investment outperform the standard.

For answers to your questions, contact Nick Stahler at the JCH team, 714-463-1663.

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