The financial markets: nursing home and assisted living stocks are 'looking good'.
Today we're at the "ground floor" for investors who want their earnings to grow along with that trend. For this brief essay, I would like to address in general terms the immediate prospects for the nursing home and assisted living sectors of the long-term care market.
The basic underlying fundamentals in this sector are expected to be very strong. Thanks to the certificate-of-need process in many states, we have virtually no increase in supply of nursing homes for a constantly growing demand. And that growing demand pertains to nursing homes specifically, the rapid growth alternative settings notwithstanding. When it comes to elderly people experiencing acute chronic illness - severe dementia, for example - there is simply no place else to put them. True, there may be a percentage of nursing home residents who would do well in less institutional settings, but the growth in real demand for nursing home services will overwhelm this as a serious factor.
That is why I see neither assisted living nor the financial uncertainties of Medicaid as posing real threats to the nursing home sector. Assisted living - and, for that matter, home health care - is not designed to handle this level of illness - and neither wants to. The states know that nursing homes are a necessity. For that reason, Medicaid reimbursement will always have to be high enough to keep the least efficient providers in business. It's not like acute care hospitals with 60% occupancy - states simply can't afford to have institutions with 90% occupancy go out of business.
Nursing homes are climbing steadily up the acuity scale. This is especially true of publicly-held nursing home companies, which have seen Medicaid as a percentage of their gross revenues decline 10% in recent years. They're focusing now on more profitable patients, and that means subacute, either Medicare- or managed care-financed.
I am one of those who believe that nursing homes will eat acute care hospitals alive in this market. Acute care hospitals are the "custom-design" shops of the health care market - multi-level, having 6 to 11 patients per wing, providing highly individualized care using expensive customized equipment. Nursing homes, for want of a better term, are the "assembly lines" - often single-level, and having 40 to 50 patients per wing, 70% unskilled labor and relatively inexpensive equipment. This will change somewhat as they move up the acuity scale, but they will still be seen as relatively cost-efficient performers. And with HMOs under growing pressure to hold the line on and even reduce premium rates, the attractiveness of nursing homes will continue to grow.
From the standpoint of the financial markets, all of this adds up to nursing homes looking good for the short and the long term.
Without question, this is the fastest growing area in health care. Not only that, but it is the last of health care's 100% private pay markets. It is virtually devoid of government interference, which may change, but perhaps not to the extent that other health care sectors have seen. From a purely economic standpoint, the assisted living sector has great appeal.
Even so, the growth does not nearly seem to be meeting the demand. By my reckoning, there are some 250,000 purpose-built assisted living beds in this country, and we anticipate perhaps another 20,000 coming on line in 1997. Nearly every assisted living bed is already filled. Even if only 10% of today's 1.7 million nursing home residents could be reasonably managed in assisted living, that's a need for 170,000 beds.
I have seen the figures suggesting that there are in fact 1.3 million (or thereabouts) assisted living beds currently available. In all honesty, I have no idea where that number comes from. Our firm deals with all the major players in the assisted living market, and the biggest I know of total 3,000 to 4,000 beds. Paul Klassen, chairman and CEO of Sunrise Assisted Living and founder of the Assisted Living Federation of America, says the total is 662,500, the majority of which are very small facilities, most of them converted private homes. In short, the numbers simply don't add up.
I have also seen reports that assisted living is overbedded in some areas of the country. This may be true of, say, Texas, which has strong demographics and relatively loose zoning. But I think we are far short of seeing this as a widespread phenomenon. Quite the contrary.
Will nursing homes expand into assisted living? From the standpoint of the public companies, I just don't see it. Assisted living operations are money losers at the start, and public companies get punished for this sort of thing. (The exception is Manor Care, whose chief executive is more aggressive and confident in this area than most.) Instead, we will see an evolution resembling what the technology companies went through: in this case, the development of subsidiaries or partnerships that incurred the start-up losses, followed by the parent company's purchase of these when they matured and started reporting earnings. Assisted living companies at this stage will become very attractive to nursing home companies and, in about five years, the purchasing spree will start.
Obviously the Clinton Administration and Congress will offer proposals to reduce Medicare costs because they have no choice. But, as with Medicaid, the question will always be, how far can we cut without closing facilities? Nursing homes are on the "safe side" there.
As HMOs become more involved in managing Medicare - and Medicaid, for that matter - they will be pushing more and more patients into nursing homes. One of the positive images that nursing homes have, from their days as private pay providers, is of cost-efficiency.
Peter Sidoti is an analyst in the Health Care Services and Medical Devices Division of NatWest Securities, a full-service broker with offices throughout the United States and Europe. Phone: 212-602-4300.
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|Title Annotation:||long-term care stocks|
|Date:||Feb 1, 1997|
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