As of 2007 there were approximately 1.7M elderly Americans in 17,000 skilled nursing facilities across the United States. These nursing homes provide care for elderly patients who require constant medical treatment, but do not require advanced care and specialized doctors in a hospital. Residents suffer from a wide variety of physical or mental disorders, and some have simply reached the age when they are simply unable to move about on their own. As the Aging Baby Boomers reach 65, the demand for nursing homes is expected to increase dramatically. This is good news for nursing home owners and operators, the majority of whom are private, for-profit institutions.
The great majority (93%) of nursing homes are operated by the private sector. Of those 67% are operated by for-profit insitutions. Historically the nursing home industry has been highly fragmented, and as of 2007 no public company owned or operated more than 2% of the nation's 17,000 nursing homes. However, in the past decade there has been a movement towards consolidation, with large corporations emerging that own or operate hundreds of properties and control thousands of beds. Increasing government regulation gives an advantage to large, multisite nursing home owners and operators. The reason is that the large corporations can spread the costs of regulation over many properties and can spend more to develop expertise in regulatory compliance.
There is also an increasing movement towards privatization. Since 2000, private equity groups have agreed to buy six of the ten largest nursing home chains, representing about 10% of the nation's total nursing home beds. In total, private equity groups control 12% of beds in U.S. nursing homes. Private equity groups that have purchased nursing home owners or operators in the last 8 years include Warburg Pincus, Formation, National Senior Care, Fillmore Capital Partners and Carlyle Group. Because revenues at nursing homes are often determined by Medicare and Medicaid reimbursement rates, private equity groups usually attempt to increase net income at nursing homes by cutting costs. At many homes, this strategy was quite effective; net income at nursing homes operated by private investment companies was 41% higher than the average of all U.S. nursing homes in 2005, according to reports filed by the facilities. However, cutting costs is controversial. According to data collected by the centers for Medicare and Medicaid research, 60% of nursing homes acquired by private equity companies cut the number of nurses on staff. It also showed that the typical resident at a nursing home owned by private equity companies received one hour of nursing care a day, compared with 1.3 hours at the average home, and that nursing homes owned by investment groups had 19% more regulatory deficiencies than the average nursing home. This has led many to criticize private equity groups for providing insufficient care.
Federal regulations prohibit Real estate investment trusts from operating healthcare properties, including nursing homes. For this reason the ten health care REITs in the U.S. that own nursing homes lease them out to operators on a triple net basis. Leasing the facilities shields health care REITs from the risks of an operator, including malpractice liability, declining occupancy rates and fluctuating government reimbursements. Below are healthcare REITs which own or operate skilled nursing facilities.
The following REITs make up 10% of Health Care REIT sector by market cap. They are listed in descending order by market cap.
Many non-REITs both own and operate nursing homes. Most of these owner/operators have a core portfolio of assets they both own and manage and a management business that leases properties from third parties. Below are U.S. public nursing home operators, organized by market cap. This list encompasses all public nursing home operators listed on U.S. exchanges; however there are many private nursing home operators that are also active in this space.
Health Care is the single largest industry in the United States based on GDP. According to the National Health Expenditures report released in January 2007 by the Center for Medicare and Medicaid Services (CMS) the healthcare industry is projected to represent 16.5% of the U.S.’s GPD in 2008. The CMS projects this will expand to 22% by 2015 as the number of Americans 65 and older is expected to grow 36% between 2010 and 2020, compared to a 9% growth rate for the general population. This trend will expand the market for nursing homes, as in 2005 over 90% of all nursing home residents were over the age of 65, with half of residents 85 or older.
Operators of skilled nursing facilities are subject to strict government regulation, and that regulation is only increasing. State inspectors visit facilities once a year at most nursing homes, many times accompanied by a federal inspector. If a skilled nursing facility fails to meet federal regulations, the state and federal government can deny Medicare or Medicaid reimbursement or close the facility. If a facility is closed, government regulations typically cause significant delays in reopening. To combat Medicare deficits, states have increasingly been passing CON laws. These laws require a health care property owner to show need for a facility before opening a facility or signing a new tenant. If the nursing home operator fails to show need for the facility under CON laws, it would result in a revocation of the facilities operating license. Even if it does show a need for the property, the approval process is often long and arduous. Penalties for failing to meet regulations are also increasing; Sens. Chuck Grassley (R-Iowa) and Herb Kohl (D-Wis.) have introduced a bill into the Senate that seeks to raise penalties for deficiencies in nursing homes. The bill would increase the fine for serious deficiencies to from $10,000 to $25,000 per instance, and increase it to $100,000 in the cases where deficiencies have led to the death of a patient.
Eighty five percent of nursing home residents receive some sort of government reimbursement. Nationally, nursing homes receive about 70% of revenue from government reimbursement programs; 50% from Medicaid, 12% from Medicare and 8% supporting Veterans Administration nursing homes. with 85% of patients receiving some form of government reimbursement. Medicare, which is federally funded, will only pay for the first 100 days in a nursing home. Residents must rely on Medicaid after that first 100 days. Medicaid reimbursement is often considered more variable than Medicare because it is partially funded by the states. During budget deficits many states look to save money by decreasing Medicaid reimbursement rates, directly impacting income at skilled nursing facilities. On the federal level, the Deficit Reduction Act of 2005 reduced funding of the Medicaid program by $4.8B over the next five years, leading many to believe Medicaid will cut reimbursement rates over that period.
Nursing homes are just one of many assisted living options for older Americans. Below is a breakdown of the different options available in senior housing, listed in increasing order of assistance provided.