U.S. healthcare spending rose to $4.8 trillion in 2023, outpacing GDP, with an estimated $15,074 in spend per person in 2024. In particular, spending on nursing homes and home healthcare is growing fast, and as a result, investors are chasing the oft-mentioned “Silver Tsunami” and looking to ride the waves of high demand and strong M&A volume to high profits.
While the sector is characterized as a very high growth platform because of these factors, acquisition or development of senior living and skilled nursing facilities requires operators to demonstrate a nuanced understanding of their location and environment so that they avoid any nuisances that may arise with their lenders, landlords and the overall viability of their facility location.
Relationship development with your lending partner
The global healthcare finance solutions market was sized at $115.9 billion in 2022 by Allied Market Research and is now expected to eclipse $276 billion by 2032. This projected growth has attracted new entrants to the lending landscape (i.e. REITs and Insurance Lifeco’s), joining traditional banks and non-bank financial institutions (such as private equity funds) looking to service this demand.
The non-bank options can appear attractive as they may have an appetite for riskier transactions and provide flexibility with structuring and covenants, with promises of quicker execution. However, these financing alternatives could end up costing more than financing structures from a traditional bank as they tend to charge higher interest rates. Building a relationship with a traditional bank that can be a consistent source of financing through periods of highs and lows is invaluable in questionable capital markets.
Knowing your ‘Pros’ and ‘CONs’
Vetting the viability of a project typically involves a well-outlined business plan that considers the pros and cons of your venture. But healthcare, in particular, is guided by another set of “Pros” and “CONs,” namely:
- The availability of “Pros” in your local market so your operation has sufficient labor to support the scale of the operation. The New York Times recently outlined how staffing agencies can charge as much as 50% more for workers, so having sightlines into how you’ll secure your staffing pipeline — or establish creative “learn and earn” programs to build one yourself — can drastically influence the certainty of your overhead estimates. Additionally, minimum staffing mandates can also have a direct impact in the level of staffing needed and ultimately effect the bottom line.
- The “CONs” (or rather the Certificate of Need conditions of each state) so you can properly assess, say, your skilled nursing facility’s outlook and if you’re blazing a trail into a state or market where you’re counting on development of high-quality healthcare that meets community needs, only to be immediately undercut by follow-on competitors setting up shop around the corner, cutting corners and undermining your ability to run a healthy business that supports the health and well-being of the individuals in your charge.
Reimbursements and reasons to maintain a relationship with your lender
Reimbursement methodology and speeds can vary wildly depending on the state, and, as such, all it can take is a slight dip in your forecasted projections, combined with a lower reimbursement rate from Uncle Sam, and you could find your business in need of some supplemental oxygen as well.
Therefore, it’s important to have an active and ongoing relationship with your lender that extends beyond the interactions that you had when originating the loan. Healthcare operators that exhibit honesty, transparency and ongoing communication are far more likely to receive accommodations when they immediately call attention to the fact that they’re experiencing challenges.
While lenders are willing to accommodate those sponsors that have communicated well and are focused on improvement, it should be mentioned that, as in the case of a true partnership, the operators need to understand that they, too, may need to work with the bank during this transition period. This may entail paying debt service out of pocket, putting up a reserve, pledging additional collateral or increasing the guaranty.
Tami Antebi is the Senior Vice President, Head of National Healthcare at BHI.
The opinions expressed in McKnight’s Long-Term Care News guest submissions are the author’s and are not necessarily those of McKnight’s Long-Term Care News or its editors.
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