The major challenges and opportunities facing senior living and care providers include bankruptcy filings, scrutiny of private equity involvement and antitrust concerns in deals.
That’s according to law firm Polsinelli, which hosted a media roundtable on Wednesday on the heels of its recent Healthcare Dealmaker’s Conference.
The 2024 first-quarter Polsinelli-TrBK Distress Indices Report, which tracks large Chapter 11 bankruptcy filings, revealed that healthcare distress (Polsinelli includes senior living in its definition of healthcare) reached its highest level in 15 years — 813% higher than in 2010 and 80% higher than in 2020.
For senior living and care providers — those who own or operate independent living, assisted living, memory care, continuing care retirement communities or skilled nursing facilities — the news only has worsened in the second quarter, according to David Gordon, a shareholder in Polsinelli’s national distressed healthcare practice.
In a preview of the firm’s second-quarter report, Gordon said that the distress is “outrageously high” for healthcare — the real estate index has a distress level at 747.5, the general economy is at 84.81, and healthcare is at 913.33 due to an “unprecedented” number of bankruptcy filings in the healthcare industry.
Labor costs
Although that distress is being experienced in all parts of the healthcare industry, particularly among rural hospitals, Gordon said that an “overwhelming surge” has occurred in senior living and care due to labor costs.
A margin-constrained business even before the pandemic due to stagnant reimbursement rates and thin margins, senior living and care took a beating during the COVID-19 pandemic, he said. As the pandemic receded, everyone thought things would improve, but “things have not gotten better,” Gordon said. “They are as bad now as at the height of the pandemic.”
Labor costs and inflation continue to escalate, but reimbursement rates aren’t keeping up, he said. Senior living and care providers, Gordon added, are competing for workers with the retail industry — which pays a higher hourly wage of $20, on average, and offers health insurance without the “sad stories,” medication issues and people living with dementia that all are factors in working in long-term care.
And with the federal minimum staffing mandate for nursing homes, Gorden said, the labor problem is only going to worsen for senior living and care providers. Senior living leaders have pointed out that operators recruit workers from the same pool as nursing homes, so although the mandate applies directly only to nursing homes, other parts of the long-term care continuum could be affected.
A glimmer of hope exists, Gordon said — what he said is the “only good news coming out of the sector” — in the Baby Boom demographic bubble that is anticipated to result in an occupancy surge. But “overall, in the distressed world, while there is a glimmer of the ‘silver tsunami’ on the horizon with the baby boomers retiring, overall, we’re seeing unprecedented levels of distress with no end in sight,” Gordon said.
Private equity
Although providers in long-term care continue to confront workforce shortages, they also are confronting increased scrutiny in their funding sources.
The healthcare industry has experienced significant consolidation in recent years, sparking concerns from federal agencies that the result is diminished choice, lower quality and increased healthcare costs. The uncertainty that this concern creates around the US healthcare market presents the most significant investment opportunity in healthcare in the past century, according to Polsinelli shareholder Bobby Guy.
New rules coming down from various federal agencies — including new merger guidelines and increased scrutiny on healthcare transactions and private equity investments — have created a “transparency tempest,” according to Guy.
That tempest, he said, is a reaction to a lack of transparency in the market over ownership and incentives.
“There is a fundamental misunderstanding of the war on private equity in healthcare,” Guy said. “It’s not actually about private equity but about investment and innovation in healthcare.”
Public fraud in the late 1990s and early 2000s led to the Sarbanes-Oxley Act of 2002, which established new financial regulations and auditing requirements for public companies. That law, Guy said, has significantly dampened the number of companies going public over the past two decades, leading to the unintended consequence of a lack of transparency.
“The lack of transparency is a result of not having public companies,” Guy said. “We created this situation where private equity is the only real investment to go into healthcare for real innovation.”
The answer to concerns, he said, is to revive the public markets to create competition for dollars.
“The transparency tempest in healthcare is happening because the government wants to see what’s happening with companies investing in healthcare,” Guy said. “What happened was, Congress intended to protect the public from bad investments; what it actually did was protect the public from almost all investments, including in healthcare.”
Arindman Kar, a shareholder in Polsinelli’s senior living office, said that the federal government’s aggressive approach to antitrust enforcement won’t end anytime soon. Private equity firms, he said, must realize and reckon with the “whole of government” approach that is using antitrust laws as tools to fix inequalities and inequities in the economy.
For private equity to succeed in healthcare, it can’t be limited to traditional deal dynamics, Kar said. Just as the government has expanded its approach, private equity firms must expand their approach to those deals, he said. Doing so, Kar added, means communicating how any deal translates to helping residents or patients, because that is the question the government is asking.
“Unless you can succinctly answer that, deals are going to continue to have significant challenges in being able to get through,” Kar said. “Only when private equity does that will it be able to overcome and address challenges from the government.”
