Seven Key Considerations When Contemplating Consolidation and Third-Party Management

The recent deluge of news articles, press clippings, expert analysis, and industry prognostication is not for the faint of heart. In many ways, it is signaling some likely inevitable realities for providers who are navigating through the lingering effects of the pandemic. We’re all familiar with the old adage: “the writing’s on the wall.”

Recent estimates have signaled that the long-term care industry endured losses in excess of $90 billion over the past two years.[1] Increased COVID-related costs, never-before-seen labor challenges, supply chain issues, and drops in occupancy have created the perfect financial storm for providers. In a June 2021 survey conducted by the American Health Care Association and the National Center for Assisted Living (AHCA/NCAL), around half of nursing homes and assisted living communities reported operating at a loss, and only one quarter were confident they would make it through the next 12 months.[2]

For some, the writing was on the wall even prior to the pandemic, but short-term COVID-related funding helped to alleviate the financial issues of the moment. In many cases, however, it only masked and buffered the long-standing challenges—especially for small chains, stand-alone providers, and organizations without adequate diversification. In 2020, over 140 skilled nursing facilities were forced to close.[3] Without additional funding, and with no purposeful strategic action, it is predicted that hundreds of facilities could face closure in the years ahead.

One likely—and practical—strategic direction that will continue to emerge is consolidation, alignment, and partnering with other regional providers, health systems, or third-party management companies that can bring capital, organizational support, scale, industry expertise, and a potential integrated network of care.

While this is an opportune time to consider consolidation and/or third-party management support, it’s essential to avoid leaping out of the frying pan and into the fire. For both the organization seeking a partner and for the potential acquirer, comprehensive due diligence is critical. Tread carefully and do your homework. A few things to consider:

1. Structure—One size doesn’t fit all. What is best for both parties? Acquisition, joint-venture, or a third-party management relationship? Consolidation and partnering can come in many different packages. Investigate up front to assess the optimal structure that will best serve the opportunity and need.
2. Cultural Alignment—Make sure there’s a good organizational fit, shared vison, and mutually aligned cultures.
3. Value Add—Given the challenges of the past couple years, some organizations will not be salvageable, regardless of the depth of support and offerings that may be provided.
4. Market Demand—Do your research to ensure there is market demand. Don’t let growth or consolidation outpace the needs of the marketplace.
5. Workforce—In addition to ensuring optimal market demand, it’s paramount to run demographic trends on workforce. There’s a growing reality that markets show great demand, but workforce demographics pale in comparison.
6. Financial Health—It’s critical that the acquiring party run significant financial analysis, benchmarking, and forecasting on the acquiree, but it’s equally important that the acquiree isn’t blind to the financial health of the potential consolidating partner or third-party manager.
7. Strategic Direction—Don’t simply consolidate to consolidate. There will be significant opportunities in the upcoming months for growth, consolidation, and/or third-party management alignment. Select a solution that’s right for your organization.

The writing has been, and will continue to be, on the wall; don’t ignore the perpetual warning signs. The numbers don’t lie. The impact of the past two years and ongoing collateral challenges will likely be the last straw for stand-alone, free-standing, and smaller operators. Consolidation, partnering, or alignment with a third-party manager may be the perfect solution. Don’t become one of the statistics: Do your homework, find the solution that best fits your needs, and take action.

Contact Us

Health Dimensions Group has a comprehensive suite of consulting services, in addition to years of experience owning, operating, and providing third-party management services for a vast array of partners. If you are contemplating a third-party management relationship, seeking due diligence assistance, or looking for help to analyze a potential consolidation opportunity, we’d welcome the chance to share more about our insights and capabilities. For more information, please contact us at info@hdgi1.com or 763.537.5700.

Authored by: Craig Abbott,
Executive Vice President of Growth

[1] www.ahcancal.org/Advocacy/IssueBriefs/Protect%20Access%20to%20Long%20Term%20Care_IB.pdf

[2] https://www.ahcancal.org/News-and-Communications/Press-Releases/Pages/Survey-Only-One-Quarter-Of-Nursing-Homes-Confident-They-Will-Make-It-Through-to-Next-Year.aspx

[3] www.ahcancal.org/Advocacy/IssueBriefs/Protect%20Access%20to%20Long%20Term%20Care_IB.pdf