The Health Care M&A Monthly: Skilled Nursing Facility Per Bed Prices Hit Six-Year Low

The financial distress suffered by the nursing home industry during the past two years has been well documented. Beginning in the middle of 1999, five of the 10 largest nursing home companies, all publicly traded, filed for bankruptcy protection, as did several smaller, privately owned chains. Although The Balanced Budget Act of 1997, with the change in Medicare reimbursement to a prospective payment system, was blamed for the mounting losses in the nursing home sector, several other factors contributed to the financial instability. These included excessive leverage, declining census, sharply higher litigation and liability insurance costs, increased competition from assisted living and rising labor costs. We would be remiss not to mention the challenging regulatory environment, as well.
Because of the problems already brewing in 1999, many people expected nursing home per bed prices to decline substantially. As it turned out, the average per bed price in 1999 declined by only 1.5% from 1998, a drop softened by an increase in higher-end properties sold. The real decline did not occur until last year, when the average price paid plunged by 10% to just over $36,500 per bed. That represents the lowest average price per bed since 1994 and the first time in five years that the average has dropped below $40,000 per bed. The median price declined by almost 13% to $33,150 per bed, which is in line with three of the past four years.
The range in prices paid in 2000, from $7,000 per bed to $79,000 per bed, was almost identical to 1999. The real difference was in the percentage of nursing homes sold in the various price ranges. Last year, 48% of the nursing homes sold were at prices below $30,000 per bed, compared to 32% in 1999. At the other end of the spectrum, only 18% of the sales were for $50,000 per bed or more in 2000, compared to 25% in 1999. These results are very similar to what happened in 1994, the last year before a significant run-up in nursing home prices. In addition, in 2000 nearly 70% of the nursing homes sold were more than 20 years old, and because of design limitations and lower capital cost reimbursement, these facilities usually sell for lower prices than newer product. A more comprehensive analysis may be found in Irving Levin’s forthcoming Senior Care Acquisition Report, Sixth Edition.
Much work remains to return the nursing home industry to a solid financial footing. The number one priority is solving the liability problem. Not only is it driving up costs, but sufficient capital will not return to the market until this issue is resolved. On the reimbursement side, Medicaid funding must become realistic, especially as the private pay population in nursing homes continues to dwindle. Finally, the regulatory environment must improve, with states and providers working together to increase the quality of care as opposed to continually being at odds with each other. Solving one of these major issues will help increase investment values and strengthen the acquisition market; fixing all three would see an abundance of capital once again flowing into this beleaguered sector.