EXPERT OPINION: A Conversation with Arnold Whitman - February 1, 2011

February 1, 2011

In this "Expert Opinion" interview, Arnold Whitman, CEO of Formation Capital, discusses the tremendous future of the skilled nursing industry and how the modernization of the sector will contribute to its future success.

Arnold WhitmanWatch the video      Read the transcript

Arnold Whitman is the founder and CEO of Formation Capital, a leading equity investor in the seniors housing and healthcare services for the elderly business. Over the past 10 years, Mr. Whitman has strategically led Formation Capital in its growth and execution of over $6 billion in transactions.  Mr. Whitman is Chairman Emeritus of NIC, a current board member for the second time, and has participated in all 20 NIC conferences.  His other interests in the “seniors” business include being a Principal in Primecare Properties, and a board member of Care Institute and Simple C.  Mr. Whitman’s 25-year career has allowed him extensive speaking engagements both domestically and internationally.  He has written and been featured in many publications including National Real Estate Investor, McKnight’s Long Term Care News, SeniorCare Investor, Contemporary Long Term Care, Assisted Living Today, Modern Healthcare and Real Estate Forum.  Among his personal accomplishments, Mr. Whitman won a gold medal for basketball at last year’s National Senior Games and has run 44 marathons. 
 

Contact Information:
Mr. Arnold Whitman
CEO of Formation Capital
1035 Powers Place
Alpharetta, GA 30004
770-754-9660
awhitman@formationcapital.com
 

 
Watch the video of the interview: 


 

Read the interview transcript:

Steve Monroe:
The skilled nursing industry has come under a lot of pressure and it’s had its ups and downs. But there’s one person who has always been in it over the years, and that is you, Arnold Whitman, CEO of Formation Capital. You’ve been investing in these properties for 15 years, 10, 15 years. What is it about the future of skilled nursing operations that you see that is positive for you right now in the sector?

Arnold Whitman:
Well—and I think it’s been more like 20 years—but I think from our perspective, skilled nursing, if you look at it as what it really is from a licensure standpoint, what you’re allowed to provide under that license; and then the opportunity of providing certain health care services at a lowest cost point, which would be for instance discharges from hospitals, recovery from surgery, short-term stay recovery-type procedures that the skilled nursing license and in the business itself, has a tremendous opportunity going into the future. I think that comes with sort of our philosophy of modernization, which you and I have talked about in the past, but I think also has a place here in the health care spectrum.

Steve Monroe:
Then there are companies out there, and as we all know it’s a very difficult business, but companies like ManorCare, your Genesis HealthCare, both companies are doing well on a census basis, doing well on driving the high-acuity Medicare. Why are other providers not being that successful in this kind of a market environment?

Arnold Whitman:
I think it’s getting more challenging because of some of the changes in the Medicare and the concurrent therapy, the anticipation of RUGs-IV. I think the whole uncertainty of health care reform is going to be very challenging for small operators. I think actually most companies, if you look at financially, have done fairly well over the last couple of years. When I say “companies,” regional operating providers. The mom-and-pops, I think it’s kind of a mixed bag. I think the challenges have been around the states that they’re operating in, the reimbursements in that state, if they’re primarily Medicaid providers. I think those that are more focused on the Medicare population and the sub-acute care have done well and will continue to do well.

Steve Monroe:
But why? How are they able to succeed when others are not?

Arnold Whitman:
It’s math. It’s pure and simply margins that are affordable to Medicare residents, the overhead that’s allocated to the nursing home itself, and the ability to drive revenue through the service side and the Medicare reimbursement structure.

Steve Monroe:
You go back, it was probably around the mid 1990s, with assisted living really coming onto the scene in full force—everyone was writing the obituary of the skilled nursing industry—and they were wrong. We all know they were wrong. So what’s going to be the main focus of skilled nursing providers this decade?

Arnold Whitman:
Again, I truly believe that the modernization of skilled nursing, where you’re refurbishing assets, where you’re rebuilding assets, and you’re truly making them into a post-acute, high-acuity transitional platform, that that business has a tremendous future. I think you’re seeing the companies—as you stated, ManorCare, Genesis, some of the higher-acuity-type providers that are going to be successful going into the future, primarily based on the nurturing of that type of a resident.

I think the more modern, the more high level of quality of care providers, the integration of nurse practitioners, the relations with the hospitals and sort of this network of health care and services that are being developed will include the skilled nursing sector in a big way, and I think as you start to get into the potential of bundling, I think they will be a successful story there in that element as well.

Steve Monroe:
So when we get the bundling of it, which 10, 15 years ago we were calling—everything was capitation and that kind of died away—who in that kind of bundling environment is going to thrive in the skilled nursing business? The Genesises, ManorCares of the world?

Arnold Whitman:
No, I think that’s right; I think it’s the higher-acuity provider—high quality of care at the lowest price point—to me seems to be the rational conclusion that you come to when you look at the future of skilled nursing. If they can provide high-quality services, good outcomes, in their facilities that will replace what today is—whether it’s a hospital or an acute-care rehab hospital or just a traditional rehabilitation facility—that the opportunity for the skilled nursing sector to thrive into the future makes all the sense in the world, from a cost perspective. If the quality of care can accommodate, then I truly believe the opportunity is there.

Steve Monroe:
A lot of the words you’ve been using are Medicare, high quality, sub-acute, high acuity, discharge from hospital.  About half of the nursing homes in the country are 35, 40 years old right now. So what is going to happen, looking in the future of the industry, how many of those are going to survive? Or can they survive and can they be modernized, or are they going to go away?

Arnold Whitman:
A very good question, and if you look at the statistics that NIC provides, you will see that the number of nursing homes is going down. But I would suggest that the number of Medicare days that are being provided has gone up. You’ve got a bifurcation that’s taken place naturally whereby the more rural Medicaid, the traditional nursing home as it’s thought of, will have a hard time in the future. Unless there are changes from a reimbursement standpoint that are favorable for the Medicaid system for those facilities, I see that trend continuing where there are going to be fewer and fewer beds in that system.

On the other hand, I see the higher acuity, the more metropolitan area, the ones that are thriving in those networks and in those sub-acute settings and in those relationships with the hospitals as being the winners.

Steve Monroe:
Okay. Reimbursement has always been an issue. Through the years, you say 20 years, through the years with all the ups and downs of reimbursement, you have seemed to adjust, and you’ve succeeded. If you can do that—I’m not demeaning you at all—but I mean, if you can do that, why are so many investors still afraid of that, when you have been so successful through the ups and downs? I mean, why isn’t that proving something?

Arnold Whitman:
I would use the example of what just happened to Skilled Health as the answer to the question. If you’re an institutional investor and you’re looking at this business and you’re saying, “I’m interested in investing; it seems like the skilled nursing sector has done very well, has given good returns to its investors. Why aren’t I in this business?”

Now, not to mention the numerous issues of regulatory reimbursement, liability, so on and so forth that they’re challenged with, the 50 different reimbursement states that you’ve got to deal with and get your arms around, but all of a sudden you see something take place in the industry that has a price tag potentially that could have been completely devastating for that company in that situation. You can’t help but step away and go, “That can happen? I mean, this happens?”

When outsiders and people who don’t understand the industry see those things, it just perpetuates that perception that this is something I don’t want to get involved in. To me, it leads to opportunity, and that’s why I’ve loved this business for so long. I think we have at Formation Capital a staff and infrastructure, both clinical and financial, that enables us to ascertain the risk and understand the business well enough that we feel that we can invest successfully, and it’s really that basic.

Steve Monroe:
Okay. So the bottom-line answer is, you don’t want that word to get out because then there will be more competition for you.

Arnold Whitman:
Yes, just a little.

Steve Monroe:
All right, thanks for shedding some light on what’s going on, and good luck next year.

Arnold Whitman:
All right, thank you, Steve.

 
 

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Great insight

Excellent interview with great insight. What was meant by "a price tag potentially that could have been completely devastating for that company in that situation?"

Jim, I believe Arnie is

Jim, I believe Arnie is referring to the massive jury award last summer against Skilled Healthcare Group, later reduced by 90%, which would have been financially devastating to the company. Steve

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