A bid to save $300 million at HCR ManorCare, and disrupt
U.S. healthcare
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[May 15, 2018]
By Tracy Rucinski
CHICAGO (Reuters) - Thomas DeRosa is making
a $4 billion bet that he can build a national, low-cost healthcare
network for America's aging population that will succeed where so many
other models have struggled.
His secret: strip out the "for-profit" business model, and leverage the
real estate in nursing homes for outpatient care.
DeRosa's strategy starts with buying out the property of the huge
bankrupt nursing home chain HCR ManorCare, and teaming up with a
non-profit hospital operator, ProMedica, to create a 30-state healthcare
system.
His own company, real estate investment trust Welltower Inc <WELL.N>, is
purchasing the ManorCare real estate for $2.7 billion under a deal
unveiled April 24 and awaiting approval from a U.S. bankruptcy court.
ProMedica is buying ManorCare's operations for $1.3 billion and
combining them with its own surgery centers, clinics and health plan to
form a network with $7 billion of annual revenues and 70,000 employees.
"This is about a health system moving into a beleaguered sector of
healthcare," DeRosa told Reuters in an interview. "We're breaking down
the wall of what has traditionally been acute care services and services
for the aging."
The aim is to strip out $300 million in costs from the operation, mainly
from cheaper rent, once HCR ManorCare emerges from its Chapter 11
bankruptcy this year, according to interviews with Welltower and
ProMedica executives.
ProMedica Chief Executive Randy Oostra expects the merger - which will
propel the group into the 25 largest U.S. health systems by revenue
alongside names like Mayo Clinic, Geisinger and Johns Hopkins - to boost
margins by two percentage points to between 3 percent and 4 percent over
the next few years.
ProMedica will also invest $400 million to revamp ManorCare's
facilities, and size up every site as an opportunity for different
services or partnerships.
And by turning non-profit under ProMedica's existing business model,
ManorCare will see other annual cost savings of $30 million.
"It is a disruptor," Arthur Caplan, director of medical ethics at the
New York University School of Medicine, said of the deal.
Yet the merged group must still overcome a perfect storm of eroding
reimbursement rates, depressed occupancies, and competition from home
health that has weighed on nursing facilities nation-wide.
To view a graphic on Real estate investments in senior housing, click:
https://tmsnrt.rs/2I8SOR5
A NEW APPROACH
The proposal comes at a time when companies from hospitals and pharmacy
chains including Tenet Healthcare Corp <THC.N> and CVS Health Corp <CVS.N>
to insurance providers and retailers like Humana Inc <HUM.N> and Walmart
Inc <WMT.N> are jostling to create new healthcare models for an aging
population as U.S. medical costs continue to soar.
Outside the health sector, Amazon.com Inc <AMZN.O> has joined forces
with Berkshire Hathaway Inc <BRKa.N> and JPMorgan Chase & Co <JPM.N> for
a new model to help bring down healthcare costs.
REITs, including Welltower, invested heavily in skilled nursing centers
at the turn of the decade but have struggled to collect, let alone
raise, rents. Large REITs like Ventas Inc <VTR.N> have since abandoned
the sector.
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A nurse reviews a chart with a patient at ProMedica’s Heartland
facility in Sylvania, Ohio, U.S., May 14, 2018. Picture taken May
14, 2018. REUTERS/Aaron Josefczeyk
For hospitals, declining payments by Medicare - the largest payer for the 65 and
over population - and declining admissions are driving a search for lower cost,
non-hospital settings to deliver care, Oostra said.
Medicare penalties for patient readmissions are also forcing hospitals to follow
up on recoveries, which often occur at a skilled nursing facility.
"Increasingly we're getting more focused on things that go on outside of our
walls," Oostra told Reuters. He calls it a "blurring of the lines" in where
clinical care starts and stops.
Enter HCR ManorCare, which in March filed one of the largest bankruptcies this
year, dragged down by debt from private equity fund Carlyle Group LP's <CG.O>
$6.3 billion buyout in 2007 and unable to keep up with $450 million in annual
rent payments to REIT landlord Quality Care Properties Inc <QCP.N>.
Under the new structure, DeRosa plans to capitalize on the trend of more
healthcare taking place outside of hospitals. This could mean basic surgeries
like hip replacements or treatment for conditions such as congestive heart
failure being provided directly in a skilled nursing center instead of a
hospital.
For a person who traditionally would have recovered from knee or hip surgery in
a skilled nursing facility, they may now receive more outpatient rehab or home
health.
Medicare already covers certain home health services and has a pilot program
that allows patients to receive care directly at a skilled nursing facility
without prior hospitalization, as is the case currently.
"Medicare is testing this out and this is where people think healthcare is
ultimately going and they want to be skating in that direction," said Chas
Roades, head of Washington D.C.-based consultancy Gist Healthcare.
Roades said the deal with ManorCare, expected to close in the third quarter, is
the first bet by a major health system on the post-acute space.
Welltower will own 160 skilled nursing and 59 assisted living and memory care
centers run by ManorCare through a 80:20 joint venture with ProMedica. ProMedica
will own ManorCare's home health, hospice and outpatient rehabilitation
businesses.
If the U.S. bankruptcy court approves the deal, ManorCare's rent will fall by 60
percent to $180 million in the first year of a 15-year master lease, with lower
annual bumps than its previous lease, according to court filings.
Welltower estimates an 8 percent cash yield from the deal.
"This is the way we'll start to drive some of the services that this aging
population will need," DeRosa said, adding that it gives the distressed skilled
nursing industry a chance of "rebirth."
"I think it's going to make other health systems stand up and take notice."
(Reporting by Tracy Rucinski; editing by Elyse Tanouye and Edward Tobin)
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