Nursing Care Facility Investing: M&A Industry Trends & Performance

Our experienced healthcare, medical, and nursing care facilities team provides investment banking advisory across the nursing care facilities ecosystem.

Nursing Care Facilities Industry Overview

An executive summary of nursing care facilities

The nursing care facilities industry in the U.S. provides wide-ranging services, such as providing living quarters, inpatient nursing, and rehabilitation services for people with chronic illnesses or disabilities. Patients, including those that are short-term, stay in these facilities on a day-by-day basis and can be extended for a longer period outside of a hospital setting. A nursing care facility is a commonplace for recovery following a procedure in a hospital. Typically, nursing care facilities have a connotation of treating the elderly, which is true to an extent. Nursing care facilities in the U.S. treat patients that are 65 and older and have even begun to include patients who are younger than 65.

Segmentation

Nursing care facilities have been used by a variety of consumers in the U.S. based on varying needs and different payment plans. These services have been used by both males and females, as well as widows.

Nursing Care Facilities Products and Services Segmentation

  • For-profit nursing homes: Nursing care facilities that provide living quarters, inpatient nursing, and rehabilitation services for people with chronic illnesses or disability for profit, typically chain-operated. These facilities are sometimes understaffed to boost profits. With licensed nurses on duty 24 hours per day, 7 days per week, facilities treat patients whose payment methods include private payment, private insurance, or Medicaid.[1]
  • Nonprofit nursing homes: Nursing care facilities that provide living quarters, inpatient nursing, and rehabilitation services for people with chronic illnesses or disabilities that do not operate solely for profit. Often, these facilities are found to be more heavily staffed and providing better care. With licensed nurses on duty 24 hours, facilities treat patients whose payment methods include private payment, private insurance, or Medicaid.[2]
  • Government nursing homes: Nursing care facilities that provide living quarters, inpatient nursing, and rehabilitation services for people with chronic illnesses or disabilities.[2] In these facilities, governments conduct a survey to certify the nursing care facility, but a regional office certifies compliance and determines if a facility can participate in Medicare or Medicaid.
  • For-profit skilled nursing homes: Otherwise known as skilled nursing facilities (SNFs), these institutions provide skilled nursing care or rehabilitation services for injured, disabled, or sick individuals to make a profit. This is typically covered through health insurance plans and Medicare.[2]
  • Nonprofit skilled nursing homes: Otherwise known as skilled nursing facilities (SNFs), these institutions provide skilled nursing care or rehabilitation services for injured, disabled, or sick individuals while operating as a non-profit. This is typically covered through health insurance plans and Medicare.[2]
  • Hospice centers: Facilities that specialize in the treatment of terminally ill patients, typically providing medical support, including doctors and nurses, 24 hours a day. The majority of these centers are for-profit, and the care provided in these facilities is outside of nursing care facilities.[2]

Nursing Care Facilities Major Market Segmentation

Major Competitors

The nursing care facilities industry in the United States is not dominated by one single company or chain. Industry-wide, the top four companies generated less than ¼ of the total industry revenue. Additionally, there is high internal competition within the industry and competition between existing nursing care facilities around the country. Price competition is difficult due to high government regulation and funding. The industry’s high revenue streams stem from Medicare and Medicaid, accounting for 75% of the revenue.[2] Medicare is a federal system of health insurance for people over 65 years of age and select younger demographics with disabilities. Medicaid differs in that it is a joint state and federal health insurance program that provides health coverage for low-income individuals. This report will be focusing on the nursing care facilities industry solely in the United States. The industry operates in all 50 states and the District of Columbia.

Larger players operating in the industry include Brookdale Senior Living Inc, Sunrise Carlisle LP, Amedisys Inc, Genesis Healthcare Corp, Atria Senior Living Group, Senior Care Centers of America, etc.

Nursing Care Facilities Industry Participants

[3], [4], [5], [6], [7], [8], [9], [10], [11]

Growth Drivers & Outlook

The industry saw annual growth from 2015-2020 of a modest 1.6%. Modest growth has occurred due to an aging population in the country. Over the next five years, experts predict the annual growth in the industry to surge to 5.1% annually.[2] This is largely due to the aging population within the United States, particularly with baby boomers. As the elderly population expands with more baby boomers growing older, more people are finding themselves in need of nursing care facilities. With age comes a higher risk of disability,  illness, or dependence on others for assistance in activities of daily life (ADL). Therefore, an increasingly aging population guides estimates of consistent and steady growth in the industry to meet increasing demands.

However, the inconsistencies and fluctuations in Medicare and Medicaid reimbursements as well as federal government budget allocations make this industry’s growth variant. From 2020 to 2025, there are projections that the elderly population in the United States will grow at an annualized rate of 3.1% to 65.2 million people.[2] This increase in the elderly population will likely result in increased spending on Medicare and Medicaid. Uncertainty regarding healthcare and regulatory changes under different administrations makes it difficult to pinpoint revenue growth rates. Further, fluctuating Medicare and Medicaid reimbursement rates make it difficult to determine exact revenue growth rates for the industry. Additionally, companies will be looking to consolidate costs, such as reducing the length of stay for patients and reducing the number of beds for patients. This may result in increased mergers, which will bolster economies of scale to strengthen services. Current projections predict the number of industry enterprises to increase at an annualized rate of 2.4% to 25,330 operators.[2] These figures are likely to be distorted due to the novel coronavirus.

Given recent developments regarding the COVID-19 pandemic, the workforce and wages have been askew. Per the Center for Disease Control (CDC), the novel coronavirus is a new coronavirus that has not been previously identified and commonly circulates among humans and causes mild illness and has officially been termed as COVID-19 by the World Health Organization (WHO).[12] Death tolls exceed 11,000 in nursing homes in the United States, as of this writing, and are expected to rise.[13] It is difficult for nursing homes to avoid the pandemic given their vulnerability, as they are home to the elderly, who are most at risk of contracting the novel coronavirus. The WHO outlines in a situation report that those over the age of 60 and/or with underlying health conditions are at higher risk of contracting severe cases of COVID-19[14]. It is imperative that employees who interact closely with patients in facilities are protected when treating patients. Nursing care facilities are forced to increase spending on personal protective equipment (PPE) to ensure the safety of employees and patients. This may drive some smaller nursing care facilities running on thin profit margins to merge or be acquired by larger companies. Aides and personal care workers who provide medical and/or personal care and come into direct and frequent contact with patients account for 2.4 million, or 53% of the 4.5 million long-term care workers. Over the current given year period, profit margins were expected to decline by 10.9% prior to the COVID-19 pandemic.[15]

However, this serves as an opportunity for nursing care facilities to reduce costs regarding other employees, such as administrative staff and certain therapists. In addition to re-evaluating in-person employment and the labor force, the current situation provides an opportunity for nursing care facilities to enhance and optimize their technological capabilities, including their software for administrative tasks and services for patients, and enhancing their video communication capabilities to streamline communication with patients. This mitigates the spread of COVID-19 and consequently protects the elderly, as well as allows nursing care facilities to further reduce costs and length-of-stay for patients, as some services provided by these facilities can occur via video communication.

Sources

[1] Non-Profit vs. For-Profit Nursing Homes: Is there a Difference in Care?, Center for Medicare Advocacy (2012), https://medicareadvocacy.org/non-profit-vs-for-profit-nursing-homes-is-there-a-difference-in-care/ (last visited May 21, 2020).

[2] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[3] About Us, About Us | Brookdale Senior Living Newsroom (2020), https://www.brookdalenews.com/about-us/ (last visited Jun 1, 2020).

[4] About Sunrise, About Sunrise Senior Living | Sunrise Senior Living (2020), https://www.sunriseseniorliving.com/about.aspx (last visited Jun 1, 2020).

[5] About Amedisys, Leading Provider of Home Health Care and Hospice Care (2020), https://www.amedisys.com/about/ (last visited Jun 1, 2020).

[6] Genesis HealthCare, Press Kit Genesis HealthCare – Press Kit (2020), https://www.genesishcc.com/about-us/press/press-kit (last visited Jun 1, 2020).

[7] Brookdale Senior Living Financial Statements 2005-2020: BKD, MacroTrends (2020), https://www.macrotrends.net/stocks/charts/BKD/brookdale-senior-living/financial-statements (last visited Jun 1, 2020).

[8] Genesis Healthcare, Inc. (2020, March 16.) Form 10-K. Retrieved from SEC Edgar website https://www.sec.gov/edgar.shtml.

[9] Sunrise Carlisle, LP Financial Statements as of and for the Year Ended December 31, 2018, Other Financial Information, and Independent Auditors’ Reports, (2019).

[10] Sunrise Carlisle, LP Financial Statements as of and for the Years Ended December 31, 2017 and 2016, Other Financial Information, and Independent Auditors’ Reports, (2018).

[11] Amedisys, Inc. (2020, February 19.) Form 10-K. Retrieved from SEC Edgar website https://www.sec.gov/edgar.shtml.

[12] Coronavirus (COVID-19) frequently asked questions, Centers for Disease Control and Prevention (2020), https://www.cdc.gov/coronavirus/2019-ncov/faq.html (last visited May 21, 2020).

[13] ‘Devastating’ Toll: Nursing Homes Turn To Federal Government For $10B In Relief Funds, Kaiser Health News (2020), https://khn.org/morning-breakout/devastating-toll-nursing-homes-turn-to-federal-government-for-10b-in-relief-funds/ (last visited May 21, 2020).

[14] Coronavirus disease (COVID-19) Situation Report – 51, (2020).

[15] Sarah True et al., COVID-19 and Workers at Risk: Examining the Long-Term Care Workforce KFF (2020), https://www.kff.org/coronavirus-covid-19/issue-brief/covid-19-and-workers-at-risk-examining-the-long-term-care-workforce/ (last visited May 21, 2020).

Nursing Care Facilities Transaction and Capital Trends

The nursing care facilities industry in the United States expects a total of $140.5 billion in revenue in 2020.[1]

[2]

In the five years leading up to 2020, the number of adults aged 65 and older grew at an annualized rate of approximately 3.3% to 56.1 million people. Likewise, revenue in the industry grew to new records at an annualized growth rate of 1.6%. In 2017, nursing care facility merger and acquisitions transactions volume fell by 10.8% to $6.2 billion. Furthermore, this industry is poised to grow with estimates showing the industry revenue will rise at an annualized rate of 5.1% to $179.9 billion in the five years up to 2025, in line with estimates of the population over age 65 rising at an annualized rate of 3.1% to 65.2 million people.[1]

Nursing care facilities are the culmination of several products and services compiled into a care service for our mostly elderly populations. These transactions include nursing facilities purchasing medical instruments, televisions and appliances, medical supplies, employment and staffing, and healthcare costs. Healthcare costs include Medicare, Medicaid, private insurance, savings, or other. Conversely, nursing homes face internal competition among each other in attempts to minimize costs, which include reducing the number of beds to meet patient demand. Nursing care facilities in the U.S. are an alternative to patients following procedures in hospitals, among other reasons. Although they can serve as an alternative to many patients, these facilities are at times bought by psychiatric hospitals, health and welfare funds, and hospitals in the U.S.

According to CMS (Centers for Medicare & Medicaid Services), 36% of residents come from acute care hospitals prior to admittance in nursing care facilities, 29% of residents come from private or semiprivate residences, 11.5% from another nursing facility, 8.5% from a hospital-based skilled nursing facility, or from an assisted living board and care or group home. [1]

Notable Deals

HCR ManorCare is among the industry leaders with over 34,000 beds and providing full services to patients. These services include traditional nursing, post-acute care, dementia care, assisted living, independent living, therapy, outpatient therapy, pharmacy, home care, and hospice. [3] They operate nationwide with a workforce of over 50,000. It was originally acquired in late 2007 by the private equity firm, The Carlyle Group. Following this acquisition, Healthpeak Properties Inc., a real estate investment trust that owns and develops healthcare real estate for life science, senior housing, and medical office tenants, bought the real estate assets of HCR ManorCare for $6.1 billion. A news release from The Carlyle Group indicated that the triple-net lease would provide for rent of $472.5 million in the first year, representing 1.5x EBITDAR coverage ratio.[4]

HCR ManorCare filed for bankruptcy in early 2018 and was purchased for $3.3 billion by ProMedica Health System in July 2018. ProMedica Health System serves 28 states and over 1.5 million patients annually. According to S&P Global Ratings, HCR has annual operating revenues of approximately $3.7 billion. [5]

The United States Congress announced a notable cut in regulations on American businesses and decreases in regulatory spending in 2018 in part of the rollback of the Dodd-Frank law in The Economic Growth, Regulatory Relief, and Consumer Protection Act. [6] This resulted in intensified competition in most industries, including the nursing care facilities industry in the United States. This led to several opportunities for mergers and acquisitions, driving smaller nursing care facilities out of business or being bought out by larger care provider networks.

One trend to take note of in the industry is increased mergers internally to strengthen economies of scale. In 2017, Brookdale and Blackstone Real Estate Advisors VIII LP formed Blackstone Venture, acquiring a total $1.1 Billion through 64 senior housing communities.

Amedisys Inc. agreed to acquire hospice care provider Adana Hospice in late 2019, adding over 500 patients to their network in eight different locations.

Valuations, Profits, and Revenues

Profit is estimated to account for approximately 10.9% of total revenue for industry operators in 2020. [1] However, despite well-calculated projections and estimates, profitability in 2020 will be difficult to gauge because of the novel coronavirus, better known as COVID-19. Under “normal” circumstances, nursing care facilities generate profit from occupancy rates, sources of payment, terms of reimbursement, patients’ acuity levels, facility ownership, and lease terms.

As previously mentioned, the nursing care facilities industry in the United States is projected to earn $140.5 billion in revenue in 2020 with anticipated 4.33% growth in the industry this year. Prior, in 2019 the industry saw 3.80% revenue growth to $134.7 billion.[1] This industry is projected to see profit and revenue growth; however, estimates remain uncertain due to recent developments regarding the COVID-19 pandemic.

An important ratio in the industry is IVA or industry value-added. This measures the nursing care facilities in the United States contribution to the U.S. economy. This valuation has remained steady over the past several years and has accelerated up to $74.6 billion and is expected to grow at an annualized rate of 2.7% because of an aging population in the United States. Furthermore, the IVA/Revenue ratio has steadily decreased since 2011 where it was estimated to be 56.7%. This ratio fell to 55.4% in 2019 and estimates have this ratio continuing to decrease.[1]

Value added by nursing and residential care facilities in the US from 2007 to 2018
(in million US dollars)

[7]

According to the Tax Foundation, the Educational and Health Care Services industry ranked fourth in terms of Gross Domestic Product, totaling near $1.56 trillion in 2017. [8]

 

Furthermore, in terms of overall economic contribution, ranked as a major contributor at 22.3 million jobs in 2017.[8]

The industry will likely see an influx of mergers and acquisitions given the increase in spending for nursing care facilities to protect patients and essential employees. Facilities with unfavorable balance sheets will likely be acquired by larger companies in the industry at discounts. The industry as a whole is seeking aid from the federal government given its heavy revenue stream from federal health insurance programs such as Medicaid and Medicare. The Nursing Home Association and The American Health Care Association are asking the federal government for $10 billion in coronavirus relief allocated from the Coronavirus Aid, Relief, and Economic Security Act (CARES).[9] The CARES Act totaled to more than $2 trillion in an economic relief package and was signed into law on March 27th, 2020.[10]

Industry Outlook

The nursing care facilities industry in the United States is expected to see increased growth over the next five to ten years due to an increasingly aging population. Currently, more than 88% of nursing home residents are over 65 years of age. Approximately 45% of nursing home residents are 85 years or older.[1] In 2018, there were approximately 52 million Americans aged 65 and older.[1] The US Census Bureau states that all baby boomers will be older than 65 years old by 2030, adding to the older population in the United States where 1 in 5 residents will be retirement age.[11] A baby boomer in this context is defined as a person born in the United States following the end of World War II, or the period from 1946-1964. They also project the US population of people 65 years and older to jump to 77 million by 2034. [12]

Some estimate the US population of people aged 65 and older to increase at an annualized rate of 3.3%.[1] This increasingly aging population is expected to drive growth in the nursing care facilities industry. Because of an increase in the population aged 65 and older, investments from PE and VC is expected to increase. Furthermore, with more patients preferring to stay at home and spend minimal time outside of the comfort of their homes, nursing care facilities are expected to have more bedding and capacity to handle an influx of patients over the next five to ten years. There are also expectations for increased internal competition and mergers for stronger economies of scale. Industry revenue is expected to continue to grow steadily, with expectations to outpace the healthcare and social assistance sector in the coming five years.

Sources

[1] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[2] Skilled Nursing Facilities Absent Effective State Oversight, Substandard Quality of Care Has Continued, Report 2017-109, https://www.bsa.ca.gov/reports/2017-109/introduction.html (last visited Jun 1, 2020).

[3] Largest Nursing Facility Companies, (2016).

[4] HCP To Acquire the Real Estate Assets of HCR ManorCare, Inc. For $6.1 Billion, Carlyle (2010), https://www.carlyle.com/media-room/news-release-archive/hcp-acquire-real-estate-assets-hcr-manorcare-inc-61-billion (last visited Jun 1, 2020).

[5] John Commins, ProMedica Finalizes $3.3B HCR ManorCare Acquisition HealthLeaders Media (2018), https://www.healthleadersmedia.com/finance/promedica-finalizes-33b-hcr-manorcare-acquisition (last visited Jun 1, 2020).

[6] Senate – Banking, Housing, and Urban Affairs, Economic Growth, Regulatory Relief, and Consumer Protection Act (2019).

[7] John Elflein, Nursing and residential care facilities value added U.S. 1998-2018 Statista (2019), https://www.statista.com/statistics/192954/value-added-by-us-nursing-care-facilities-since-1998/ (last visited Jun 1, 2020).

[8] Scott Eastman, Education, Health Care, and Social Assistance Industries Employ the Most Tax Foundation (2019), https://taxfoundation.org/gdp-and-employment-by-industry/ (last visited Jun 1, 2020).

[9] ‘Devastating’ Toll: Nursing Homes Turn To Federal Government For $10B In Relief Funds, Kaiser Health News (2020), https://khn.org/morning-breakout/devastating-toll-nursing-homes-turn-to-federal-government-for-10b-in-relief-funds/ (last visited May 21, 2020).

[10] U.S. Department of the Treasury, The CARES Act Works for All Americans (2020), https://home.treasury.gov/policy-issues/cares (last visited May 21, 2020).

[11] US Census Bureau, Older People Projected to Outnumber Children The United States Census Bureau (2019), https://www.census.gov/newsroom/press-releases/2018/cb18-41-population-projections.html (last visited May 21, 2020).

[12] Baby Boomer, Merriam-Webster, https://www.merriam-webster.com/dictionary/baby boomer (last visited May 21, 2020).

Nursing Care Facilities Industry Performance

Estimates project the long-term care market size to grow at a CAGR of 6.8% to $751.9 billion by 2027. [1] These estimates are backed by the dominance and continued expectations of this industry increasing revenue growth from 2019. Revenue for the nursing care facilities industry in 2020 is estimated to be $140.5 billion and is expected to climb to $179.9 billion in 2025. [2] The anticipation of increased revenue reflects an increase in the aging population, and therefore an increase in the market share of nursing care facilities. The nursing care facilities industry is expected to steadily increase through 2027 and beyond.

The long term care market in the US was recorded at $443.2 billion in 2019 and is expected to increase at a CAGR of 6.8% in years to come. [3] The top four companies in the nursing care facilities industry generated less than ¼ of the total industry revenue. [1] This leaves a plethora of room for aggressive growth and competition in the coming years with an aging population that requires more nursing care facilities and services, which will also result in increased mergers and acquisitions activity in the coming years, especially given the uncertainty and increased spending caused by COVID-19.

2020 Total Revenue: $140.5 billion

Annual Growth 2015-2020: 1.6%

Projected Annual Growth 2020-2025: 5.1%

Key Drivers

Federal funding for Medicare and Medicaid

Medicare and Medicaid reimbursements account for 75% of the industry’s $140.5 billion revenue. [2] The federal government’s funding and accessibility to these programs impact demand and prices charged in the industry. The uncertainty and ambiguity in terms of funding and regulations pose a threat to the industry. Medicare is the federal health insurance program for people who are 65 years of age and older and certain younger people with disabilities. [4] Medicaid is a joint state and federal health insurance program for low-income adults, children, pregnant women, elderly adults, and people with disabilities. [5] The CARES Act has allocated $200 million to the Centers for Medicare and Medicaid Services (CMS). Overall, nearly $250 billion was funded for health or health-related activities under the CARES Act. [6]

Number of adults age 65 and older

The aging population in the United States is expected to contribute to growth in the industry. Over 88% of the population in nursing homes is over the age of 65. [2] Since this population is more prone to injury and illness, they need more assistance with ADLs, or activities of daily life. ADLs include activities such as dressing, eating, and bathing. The percentage of patients requiring help with ADLs is expected to increase, which further intensifies demand for nursing care facilities and services.

Technology

As with most sectors and aspects of daily life, technology has proven to optimize performance and cut costs. Nursing care facilities have shifted focus to optimize technological capabilities at facilities through purchases of newer medical devices and updating software that stores health data. Companies in the industry have spent more on technological capabilities to enhance remote care, including telemedicine and telemedicine medical devices to treat patients from the comfort of their home. Such spending has proven to be essential to the survival of facilities due to the spread of COVID-19.

Federal expenditure on disability benefits and government reimbursement rates

Disability expenditures are expected to increase and drive industry demand, however federal expenditure on federal disability benefits is expected to decline slightly. As defined by the US Census Bureau, disability is a long-lasting and serious difficulty with four basic areas of functioning – hearing, vision, cognition, ambulation. Payments for Medicare and Medicaid to nursing care facilities are based on changeable rates as determined by the CMS, the Centers for Medicare & Medicaid Services. [7]

Number of people with private health insurance and changing demands

Private insurance is any health insurance policy purchased by an employer or an individual from a private insurance company, and often reduces out-of-pocket costs for patients and incentivizes them to take full advantage of this coverage. [8] It is projected that the number of people with private health insurance will slightly decrease. The recent rollback of some components of the Affordable Care Act can be attributed to this slight decline. Regarding the impact of COVID-19, millions of individuals are being laid off, and in turn, losing their health insurance through their employers. The number of adults 65 years and older is expected to grow at an annualized rate of 3.3% in the five years leading up to 2020. [2] With an aging population, facilities must be more well-equipped to treat more patients with more complex issues and provide specialized care. An influx of patients requiring more care also means more staff will be required to meet this increase in demand, as well as ensuring there are adequate resources for patients and providers alike.

Per capita disposable income

Per capita income was expected to rise, prior to the emergence of COVID-19. An increase in household income makes consumers more likely to afford and purchase insurance and out-of-pocket expenses. This in turn increases the demand for nursing care facilities.

Real Disposable Income Per Capita in the United States 2020. Source: Federal Reserve Economic Data (FRED)

Key Restraints

Regulation

The nursing care facilities industry in the United States is heavily regulated considering it is part of the Healthcare sector and has strong revenue streams from federal health insurance programs. Such regulation includes a CON or certificate of need. This legal document is required in many states before acquisitions, creations, or expansions are considered. Furthermore, facilities are regulated in terms of treatment, price and cost, staffing requirements, and facility ownership on state and federal levels. These make the industry much more difficult to enter and therefore results in increasing internal competition and mergers.

CON Programs in the US by State [9]

Industry Lifecycle Stage

The nursing care facilities industry is in the mature stage of its lifecycle. Through the ten years leading up to 2025 the IVA, or industry value-added, is expected to grow at an annualized rate of 2.7%, growing at a similar rate of GDP projections. [2] However, the GDP is difficult to calculate given recent developments regarding COVID-19 and the economic shutdowns and lockdowns in states across the country. Expansion in the industry is limited due to heavy regulation in funding, so growth cannot boom in the industry. Additionally, nursing care facilities have long been part of the U.S. economy and is not expected to see a dramatic increase despite a growing aging population. Therefore, it is likely for there to be continued acquisition within the industry as evidence of growth.

Sources

[1] United States Long Term Care Market Insights, 2020-2027: Home Healthcare, Hospice, Nursing Care, Assisted Living Facilities – ResearchAndMarkets.com, Business Wire (2020), https://www.businesswire.com/news/home/20200409005320/en/United-States-Long-Term-Care-Market-Insights (last visited May 21, 2020).

[2] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[3] U.S. Long Term Care Market Size, Share: Industry Report, 2027, U.S. Long Term Care Market Size, Share | Industry Report, 2027 (2020), https://www.grandviewresearch.com/industry-analysis/us-long-term-care-ltc-market (last visited May 21, 2020).

[4] What’s Medicare?, Medicare, https://www.medicare.gov/what-medicare-covers/your-medicare-coverage-choices/whats-medicare (last visited May 21, 2020).

[5] Medicaid: Medicaid, Medicaid Home, https://www.medicaid.gov/medicaid/index.html (last visited May 21, 2020).

[6] Kellie Moss et al., The Coronavirus Aid, Relief, and Economic Security Act: Summary of Key Health Provisions KFF (2020), https://www.kff.org/global-health-policy/issue-brief/the-coronavirus-aid-relief-and-economic-security-act-summary-of-key-health-provisions/?gclid=EAIaIQobChMIkZTsooPa6QIVAtvACh1DZQ6FEAAYASAAEgIln_D_BwE (last visited Jun 1, 2020).

[7] Disability Status, Census.gov, https://www.census.gov/quickfacts/fact/note/US/DIS010218 (last visited May 21, 2020).

[8] Public & Private Insurance, DATI, https://dati.org/funding/insurance_basics.html (last visited May 21, 2020).

[9] National Conference of State Legislatures. (2019, December 1). CON-Certificate of Need State Laws. Retrieved June 22, 2020, from https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx

Nursing Care Facilities Key Performance Indicators

Key Performance Indicators (KPIs) in nursing care facilities in the United States

The nursing care facilities industry in the United States is projected to earn $140.5 billion in revenue and grow steadily at about 1.6% annually, with a 10.9% profit margin decline in 2020. [1] The overall long-term care market is expected to grow at a CAGR of 6.8% leading to 2027. [2] This article focuses on the key vocabulary and major statistics in the nursing care facilities industry in the United States.

Industry Jargon & Key Terms

Activities of Daily Living (ADL): Day-to-day tasks, such as preparing meals, shopping, managing money, taking medication, and housekeeping.

Acuity: The measurement of the types of disorders, their severity, and the intensity of the symptoms.

Home Healthcare: Medical and nursing services that are provided in a person’s home by a licensed provider.

Hospice Care: Comfort and care provided to patients with a terminal illness and their families, which may include medical care, counseling, and social services.

Long-Term Care: Treatment for a chronic condition, trauma, or illness that limits a person’s ability to carry out basic self-care tasks, called activities of daily living (ADLs).

Medicare and Medicaid: Cost coverage programs. Medicare is a federal system of health insurance for people over 65 years of age and select younger demographics with disabilities. Medicaid is a joint state and federal health insurance program that provides health coverage for low-income individuals.

Respite Care: Temporary relief for caregivers, ranging from several hours to several days, which may be provided in-home or in a residential care setting, such as an assisted-living facility or nursing home.

Certificate of Need (CON): State regulatory mechanisms for establishing or expanding health care facilities and services in a given area. [3]

Key Ratios

Liquidity Ratios

Coverage Ratios

Leverage Ratios

Operating Ratios

Sources

[1] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[2] U.S. Long Term Care Market Size, Share: Industry Report, 2027, U.S. Long Term Care Market Size, Share | Industry Report, 2027 (2020), https://www.grandviewresearch.com/industry-analysis/us-long-term-care-ltc-market (last visited May 21, 2020).

[3] Jack Pitsor & Alise Garcia, CON – Certificate of Need State Laws CON-Certificate of Need State Laws (2019), https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx (last visited May 21, 2020).

Major Markets and Demand Determinants

Major subsectors and demand determinants in nursing care facilities in the United States

The nursing care facilities industry is a major component of the Healthcare and Social Assistance sector in the United States. This industry serves people with chronic illness or disability and is most commonly used among adults over the age of 65, as patients are provided with rehabilitation and therapeutic services, living quarters, and inpatient nursing. Patient care and length-of-stay in facilities are typically for longer durations for individuals who may need more help performing activities of daily life (ADLs). This article will discuss major services, market demand drivers, regions, and end-users.

Major Services

The nursing care facilities industry in the United States is segmented into services provided, including for-profit nursing homes, nonprofit nursing homes, government nursing homes, for-profit skilled nursing facilities (SNFs), nonprofit skilled nursing facilities (SNFs), and hospice centers.

Nursing Care Facilities Products and Services Segmentation

Demand Determinants

  1. Aging Population: The U.S. Census Bureau is projecting that by 2034 the population of older adults will outnumber the children in terms of population size with expectations of 77 million people age 65 and older. [1] Furthermore, research and projections from IBIS World indicate that the adult population in the U.S. will increase at an annualized rate of 3.3% in the five years up to 2020. [2] The influx of aging Americans from baby boomers turning 65 and older, both the demand and the industry are poised to grow significantly.
  2. Increase in Chronic Diseases and Illness: Chronic and infectious diseases have continued to become more prevalent in the number of cases and diagnoses in patients, in turn with an aging population. The National Institute on Aging, a subsidiary of the National Institutes of Health, estimates that more than 5 million Americans may have dementia caused by Alzheimer’s, with most of these cases among individuals age 65 and older. [3] Therefore, care assistance will be required by more people, driving demand, and growth in the industry.

Major Markets

Region

The market will continue to grow as America’s population grows older and diseases and chronic illnesses are more common across older populations. Establishments are in the Southeast, Great Lakes, West, Mid-Atlantic, and Southwest. A trend among some members of the elderly population is to retire in warmer geographic regions, specifically the West and Southeast. The U.S. Census Bureau estimates that about 13% of the rural population is over 65 years old, compared to that of urban populations, 12%. Data from the Texas A&M University System Health Science Center indicates that 40% of all nursing homes are situated in rural areas. [2]

Regions and Business Locations

End-User Demographics

The end-user of services provided by nursing care facilities include any individual, both below 65 and those who are 65 and older. In fact, 11.7% of residents are below the age of 65. [2] Services are used by men below and above 65 years of age. Likewise, these services are used by women below and above 65 years of age.

Nursing Care Facilities Major Market Segmentation

Sources

[1] Haya El Nasser, The Graying of America: More Older Adults Than Kids by 2035 The United States Census Bureau (2019), https://www.census.gov/library/stories/2018/03/graying-america.html (last visited May 21, 2020).

[2] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[3] Alzheimer’s Disease Fact Sheet, National Institute on Aging, https://www.nia.nih.gov/health/alzheimers-disease-fact-sheet (last visited May 21, 2020).

Nursing Care Facilities Industry Competitors in the United States

Major industry players and their share of the overall nursing care facilities market

Market Share Concentration

The nursing care facilities industry is not dominated by one or two companies. Concentration in the industry is low as the top four players contributed to less than ¼ of the industry’s total revenue. [1] This industry is largely fragmented due to smaller scaled, family-owned facilities and facilities that are privately owned. However, there has been increased M&A activities largely due to looser regulations and tax-breaks for larger companies, enabling them to acquire smaller facilities that specialize in care to strengthen economies of scale. Competition exists within the industry between small and large players alike in terms of quality of service.

Pricing is competitive but is under control due to its presence in the health care sector, heavy regulation, and reimbursements from programs such as Medicare and Medicaid. Given the uncertainty surrounding the COVID-19 pandemic and its blow to nursing care facilities, some facilities will likely seek to consolidate their services to maintain profitability, which could result in increased M&A activity. Some of this increased activity is likely to include strategic buyers with strong balance sheets looking to enhance economies of scale for discounts. Specifically, larger companies are on the lookout for smaller facilities facing the strains of COVID-19. Moreover, this activity had been accelerated by financial buyers in the private equity space purchasing nursing and health care facilities at a discount, minimizing costs, maximizing profits, and then reselling to other private equity firms, such as KKR and Blackstone. The strength of financial buyers is likely to continue and pose a threat to strategic buyers.

Key Success Factors

The nursing care industry in the United States is entering the mature stage of its lifecycle in the industry, with a notable increase in consolidation across the industry to minimize costs and optimize services to patients. There has been an increased emphasis on economies of scale throughout the industry.

  • Access to a highly-skilled workforce
  • Effective quality control
  • Proximity to key markets
  • Understanding government policies and their implications
  • Optimize capacity utilization

Barriers to Entry

The nursing care facilities industry in the United States has medium barriers to entry. This industry is highly regulated by state and federal governments as it is a subset of the healthcare sector and houses patients. Additionally, the industry receives payments from Medicare and Medicaid reimbursements, accounting for 75% of industry revenue. [1] Some states require participants to obtain a certificate of need (CON) and must be approved by state governments before constructing or expanding on facilities. Operators must adhere to regulations from local, state, and federal governments. In terms of employment, employees must be highly skilled and certified in their fields in order to provide care to patients in facilities.

  • Heavy regulation
  • Highly skilled workforce
  • Marketing and gaining market share

Sources

[1] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

Nursing Care Facilities Industry Operating Conditions in the United States

Industry Operating Conditions

Capital Intensity: LOW

Technology Change: LOW

Revenue Volatility: LOW

Regulation: HIGH

Industry Assistance: HIGH

Capital Intensity

The level of capital intensity is low in the nursing care facilities industry. This is measured by the ratio of capital to labor in an industry. In the nursing care industry, high amounts of labor input are required, whereas capital input requirements are not very high. This figure has remained steady over the five years leading up to 2020 where for every $1.00 spent on labor, $0.06 was spent on capital equipment. [1] Furthermore, labor streams are expected to remain plentiful in supply with projections of 3.6 million registered nurses (RNs) in demand by 2030 according to the Bureau of Health Workforce. Moreover, the number of graduates from nursing programs have increased from 68,800 in 2001 to 158,000 in 2015. [2] RNs are the primary care providers to patients and residents in nursing care facilities, assisting with ADLs, and any health-related activities. As per the Bureau of Labor Statistics, RN employment is projected to grow 12% from 2018 to 2028, largely driven by higher demand for healthcare services due to an increasingly aging population. [3]

The increase in the aging population is not limited to patients and residents, as there are baby-boomers amongst nurses as well. A 2018 survey conducted by the National Council of State Boards of Nursing and The Forum of State Nursing Workforce Centers found that 50.9% of the RN workforce is 50 years of age or older. [4] Coupled with aging populations amongst patients and RNs, a shortage of nurses is expected. With more RNs retiring and an influx of patients and residents, there is a high demand for young nurses and RNs from college. However, a report from the American Association of Colleges of Nursing (AACN) indicated that nursing schools in the U.S. turned away over 75,000 qualified applicants from nursing programs in 2018 because of insufficient funds. [4]

Technology & Systems

Given that the nursing care facilities industry is service-based, the level of technology change is low. Spending in terms of technology and systems is required for medical devices to take proper care of patients and software systems to update patient’s records and expedite treatments to minimize costs. Larger companies that operate in more locations are more likely to upgrade their technological capabilities due to higher revenues.

With nursing care facilities adapting to shifting demands of patients and families, there has been a trend to minimizing the length of long-term-stays so patients can spend more time in the comfort of their homes. There has also been an uptick in home primary care (HPC) to minimize costs for patients and facilities, allowing facilities to consolidate costs, such as bedding capacity. Especially given the travel limitations and vulnerability of patients and employees alike due to COVID-19 now serves an ample time for service providers to bolster technology capabilities and systems to ensure functionality and meet demand. Larger companies will likely play a larger role in this development and transition to telehealth and HPC after the COVID-19 pandemic.

Revenue Volatility

The level of revenue volatility in the nursing care facilities industry is low. This low volatility rate has been dampened by a larger number of Americans aged 65 and older which has decreased vacancy rates in facilities. Due to trends and expectations of an increasingly larger population over the age of 65, this trend is expected to continue. As these services are essential during any economic period, macroeconomic trends do not have a direct relationship or impact on the industry. Care providers are exposed to vulnerability and volatility given its large revenue stream from reimbursements from Medicare and Medicaid payments. These policies and rates are determined by state and federal governments and impact the profitability of nursing care facilities.

Regulation & Policy

The level of regulation in the nursing care facilities industry is high in the United States. Nursing care facilities are heavily regulated due to their role in the healthcare sector and their relationship with government funding. Facilities are regularly inspected by local, state, and federal officials to ensure regulations are being followed. Some of these regulations include licensure, the conduct of operations, allowable costs, addition of facilities, ownership of facilities, services, and their prices, staffing requirements, and privacy and security regarding patient health information. Penalties regarding payment include termination from Medicare and Medicaid programs, demands for a refund for overpayments, civil penalties, and restrictions on Medicare and Medicaid payments for new admissions.

Most states also require facilities to have a CON, or certificate of need, in order to commence or continue construction and expansion of facilities. This was first signed into law in 1964 in the state of New York and several states followed the trend. Ultimately, Congress passed the National Health Planning and Resources Department Act of 1974 to enhance federal funding for health planning regulations on the state and local level. [5] Facilities are required to maintain the privacy of patients through the Health Insurance Portability and Accountability Act (HIPAA). Additionally, nursing care facilities face liabilities with patients and are vulnerable to lawsuits. Regulation is certain to remain high, however, the specificity of regulations in terms of patient care and monetary policies through programs with reimbursements such as Medicare and Medicaid are subject to fluctuation through different administrations.

Industry Assistance

The level of industry assistance is high in the nursing care facilities industry in the United States. The majority of industry assistance comes in the form of Medicare and Medicaid programs as the federal government makes payments to participating nursing care facilities based on their several formulas. Medicare covers services provided by skilled nursing facilities (SNFs) for both long-term stays and short-term treatments and visits. Rates are determined by state and federal governments and fluctuate from state-to-state.

In addition to assistance from the government, nursing care facilities also rely on industry associations. Some of these include the American Health Care Association (AHCA), a nonprofit organization representing various types of nursing care facilities from thousands of state health organizations. Organizations such as the AHCA and LeadingAge conduct research on the industry and implications of any policy change to take note of.

Sources

[1] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[2] Supply and Demand Projections of the Nursing Workforce: 2014-2030, https://bhw.hrsa.gov/sites/default/files/bhw/nchwa/projections/NCHWA_HRSA_Nursing_Report.pdf (last visited May 21, 2020).

[3] Registered Nurses: Occupational Outlook Handbook, U.S. Bureau of Labor Statistics (2020), https://www.bls.gov/OOH/healthcare/registered-nurses.htm (last visited Jun 8, 2020).

[4] Nursing Shortage, American Association of Colleges of Nursing: The Voice of Academic Nursing (2019), https://www.aacnnursing.org/News-Information/Fact-Sheets/Nursing-Shortage (last visited Jun 8, 2020).

[5] Jack Pitsor & Alise Garcia, CON – Certificate of Need State Laws CON-Certificate of Need State Laws (2019), https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx (last visited May 21, 2020).

M&A Investment Trends and Strategies

The nursing care facilities industry in the US is attractive because of its stability, size, and growth.

Large, Stable Industry

In 2019, the industry saw revenue of approximately $134.6 billion with estimates of $140.5 billion in industry revenue in 2020. The previous five years saw a modest and steady annual growth of 1.6%. However, this growth rate is expected to boom in the coming five years leading to 2025 at 5.5% in anticipated annual growth. [1] The market is mature and the need for healthcare services, particularly nursing care facilities, will remain prominent in the United States. Steady growth paired with an aging population bodes well for the industry. Moreover, smaller facilities are facing more pressure during the COVID-19 pandemic and will likely soon merge with other facilities or become acquired by larger companies. Evidently there is a high potential for upside.

Growing Demand

The demand for services provided by nursing care facilities has steadily increased through the past years as evident in annual growth rates. Moreover, the industry is primed to flourish due to its nature as an essential service and expectations of higher annual growth rates in the coming five years leading up to 2025.

A high number of adults age 65 and older

The number of adults aged 65 and older is expected to grow at an annualized rate of 3.3% leading up to 2025, driving demand, and therefore revenue growth industry-wide. [1] Elderly populations are naturally more vulnerable to chronic illnesses and chronic diseases, including COVID-19. With more people requiring care and treatment for their ailments, the industry will see an increase in demand.

Horizontal vs. Vertical M&A

Horizontal

As a whole, the industry is confined in terms of differentiation as all nursing care facilities provide services and treatment for patients. Aside from payment methods, these facilities differ in their treatment quality, which is largely subjective and individualized and difficult to replicate exactly.

Vertical

Nursing care facilities have been expanding vertically in addition to horizontal growth and expansion. This has been most prominent through the acquisition of nursing care facilities by real estate investment trusts (REITs), such as Welltower, and private equity groups such as the Carlyle Group. [2] ProMedica Health System acquired HCR ManorCare after their filing for bankruptcy and acquired their facilities in the process. [1] There has been a notable increase in activities among REITs in the past two months due to the effects of the novel coronavirus.

Outlook

The nursing care facilities industry in the United States is a prominent component of the healthcare sector in the U.S. and will continue to be. Aging populations will aid this steady industry and is positioned to grow steadily for the next five to ten years. An increase in acquisitions by private equity groups and REITs will also be a driving factor in the industry’s growth, however, the acquisition activity will remain volatile in the coming months because of the COVID-19 pandemic.

Notable Transactions 

A strategic combination between Atrium Health and Wake Forest Baptist Health in April 2019. Amedisys Inc. acquired Compassionate Care Hospice for $340 million in 2019, catapulting Amedisys to the third-largest hospice provider in the United States. Amedisys is based out of Baton Rouge. Further, hospice and home health provider, Compassus, agreed to be bought by TowerBrook Capital Partners private equity firm, headquartered in New York and London.[3]

Nursing Care Facilities Select Transactions [4] [5]

Sources

[1] Dmitry Diment, Nursing Care Facilities in the US, IBIS World 1–35 (2020), https://www.ibisworld.com/united-states/market-research-reports/nursing-care-facilities-industry/ (last visited May 20, 2020).

[2] Chuck Sudo, Transactions & Financings: Welltower, Healthpeak Reportedly Sell South Florida Communities at Steep Discounts Senior Housing News (2020), https://seniorhousingnews.com/2020/05/13/transactions-financings-welltower-healthpeak-reportedly-sell-south-florida-communities-at-steep-discounts/ (last visited Jun 1, 2020).

[3] Angela Humphreys et al., Healthcare Transactions: Year in Review Modern Healthcare (2020), https://www.modernhealthcare.com/mergers-acquisitions/healthcare-transactions-year-review (last visited May 30, 2020).

[4] Amedisys, Inc. (2020, February 19.) Form 10-K. Retrieved from SEC Edgar website https://www.sec.gov/edgar.shtml.

[5] TowerBrook & Ascension Health To Buy Compassus, OPEN MINDS (2019), https://www.openminds.com/market-intelligence/bulletins/towerbrook-ascension-health-to-buy-compassus/ (last visited Jun 8, 2020).

 

Ameen Iraqi contributed to the research and development of this report.

Nate Nead
Nate Nead
Nate Nead is a licensed investment banker with Four Points Capital Partners, LLC and Principal at Nead, LLC. Nate works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. Four Points Capital Partners, LLC is a member of FINRA and SIPC and registered with the SEC.