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Slicing and dicing nursing home business risk

June 13, 2012
by Kevin R. McMahon, LNHA
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The nursing home industry is not meant for the fainthearted. It is an environment brimming with risk of all shapes and sizes. The pressures that drive these risks spring from regulations, the reimbursement system (Medicare and Medicaid) and good old-fashioned market forces. For this analysis I have divided the risks that the nursing home industry faces into two distinct types: Business Risk of Capital and Business Risk of Operations.

BUSINESS RISK OF CAPITAL (BRC)

BRC is the risk that the capital investment of the owner (also known as the capitalist/owner) takes that the real estate/buildings, beds and business will decline in value for many reasons. There are two major business risks faced by the nursing facility owner:

  • Macro-market risk is linked to the demand for nursing home services. Macro-market conditions include factors such as community-based services drawing potential customers away from institutional providers.
  • Micro-facility risk, the second risk that BRC owners face, include issues such as bad surveys, bad reputation, facility wear and tear or poor service quality. 

BRC is significant because the owner of the bricks/beds/business faces both macro-market risks as well as risks that flow from the day-to-day facility operation. The capitalist/owner has invested his or her own money in the nursing home operation. This relationship is not defined by a paper lease or management contract but rather by the significant act of investing one’s wealth in real estate and a business. Despite the fact that nursing homes operate in a governmentally protected marketplace, they operate in a particularly volatile environment subject to increasing regulatory regimens and reductions in reimbursement.

In addition, the capitalist/owner faces, albeit indirectly, the full panoply of operational risks that besiege the typical nursing home. The owner may not be in the direct line of fire, but the trickle-down effect of poor care and service quality can have a deleterious and often a disastrous effect on the underlying value of one’s asset.

BUSINESS RISK OF OPERATIONS (BRO)

This term defines the risks that a nursing home operator faces. One may:

  • not get paid (receivables);
  • not get paid enough (reimbursement);
  • not find enough customers (revenue); or
  • get sued, shut down by the state, get unionized or simply die a death of a thousand pinpricks (in a nursing home, anything that can go wrong often does).

The risks that nursing homes face on a daily basis should not be minimized. Although they operate in a governmentally protected market, nursing homes still face inordinate risks that spring from the regulatory system, reimbursement programs and unforgiving market forces.

For entry level hands-on caregivers, our industry functions on a wage-scale comparable to the fast-food industry. In terms of the life-and-death risks they face, nursing homes are on par with any healthcare provider including the medical-surgical services of any hospital.

A RISK COMPARISON

An attorney once told me about an old nursing home family that went into the hospitality industry (hotel/motel) and how that was as bad as the nursing home business. I replied that most hotel/motel owners do not lay awake nights worrying about their guests experiencing an untimely death or disability and cascading recriminations from every second-guessing regulator or attorney that can poke their finger in the face of the nursing home operator.

Lawsuits, retroactive reimbursement denials, never-ending cuts to Medicare and Medicaid, families that think mom’s social security check is theirs and that paying bills is optional, damage wrought by the least motivated one percent of any workforce, demanding family members plus a thousand more sad realities are all a part of the risk inherent in nursing home operation. 

These risks can be managed and controlled to a degree, but only a fool (or someone outside of the industry) would believe that they can be eliminated.

OWNER/OPERATOR MODELS

Operators in the nursing care environment operate in one of the following arrangements: 

  • Owner/operator melded into one entity
  • Lease agreement between owner and operator
  • Management contract between owner and operator

Admittedly, this is not an exhaustive list of owner/operator arrangements, but it is a fairly good summary of the major ones used in the LTC industry. Each arrangement in some way alters the level and texture of BRO faced by the operator as well as the BRC of the capitalist/owner. 

Combined owner/operator. This model is epitomized by the large national, regional and state chains. They are both owner and operator melded into one single organizational entity that takes on all of the business risk inherent in both the ownership and operation of nursing homes—the BRC and the BRO. It is a model that has many examples of failure with many chains going out of business over the past 30 years.

The reasons for failure of this model are many and varied. Undoubtedly the concentration of all of the business risk (BRO and BRC) in a single organizational entity likely has contributed to the failure of some of these organizations.

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