FutureFocus May 2, 2018: Multi-Mega Deals Change Post-Acute Future

Lisa Remington

In this week’s FutureFocus, we discuss the announcement of the recent mega-mergers reshaping the future of post-acute services. The transactions position Humana to become the largest hospice provider, and ProMedica Health System as the second largest post-acute and long-term care provider. In our Washington Report, CMS's Center for Medicare & Medicaid Innovation (CMMI) is changing its direction. We share their 8 new focus areas.

Lisa Remington, President, Remington Health Strategy Group

Ohio-based ProMedica Health System announced plans to acquire HCR ManorCare, the second largest post-acute and long-term care provider in the U.S. The acquisition would take place through a joint venture with Welltower, a healthcare real estate and investment trust. ProMedica would become the 15th-largest health system in the U.S. with $7 billion in annual revenue, if the deal is finalized. Six things to know:

  1. First of its kind partnership spans full spectrum of care, including wellness, skilled nursing, memory care, assisted living, hospice and home care.
  2. Partnership to create an approximate $7B health network with 70,000 employees in 30 states
  3. ProMedica will invest as much as $400M of growth and upgrade capital over the next five years
  4. Welltower and ProMedica have jointly entered into agreement to acquire the real estate of Quality Care Properties
  5. The partnership will enable ProMedica to gain immediate scale in the fast-growing home health and post-acute care markets, obtain a best-in-class portfolio of assets staffed by highly trained and dedicated healthcare professionals, and develop a diversified business that can better evolve with the current healthcare industry.
  6. ProMedica, which operates in six states, will expand its footprint into 30 states, employing approximately 70,000 people with projected annual revenues of $7B.

“We want to take down the wall between traditional hospital and post-acute care services in an effort to enhance the health and well-being of our aging population,” said Randy Oostra, ProMedica president and CEO. “The lines are blurring between where health care begins and stops. This acquisition provides us the platform to think differently about health and aging.”

“This is an exciting opportunity for Welltower and singularly validates our strategy of partnering with major health systems to drive health care delivery to lower cost settings while improving health outcomes,” commented Welltower CEO Tom DeRosa. “This acquisition will enable ProMedica to expand their service offering beyond acute care hospitals to include home health, post-acute care and residential memory care. ProMedica’s unique wellness focused strategy and investment commitment to the HCR ManorCare assets will make them more consequential sites of care and enhance their value. We are very happy to be the real estate capital behind this transformative transaction.”

The merger is part of the industry's ongoing models for vertical integration, according to  from Fitch Ratings. Whether or not the ProMedica/HCR combination is ultimately successful may hinge on how it implements its strategy in markets where the hospital and skilled nursing footprints do not overlap, how they manage growing from a regional to national organization and whether the committed capex is sufficient to improve operating performance. Regardless of its success, the transaction crystalizes the extent to which skilled nursing real estate values declined. 

2019 SNF Payment Increasing

The news of the acquisition comes on the heels of CMS announcement that SNF’s will receive a 2.4% increase, or $850 million more, over FY 2018:

SNF payments would increase by 2.4% over FY 2018 levels, as mandated by the Bipartisan Budget Act of 2018,an $850 million increase. No forecast error correction would apply in FY 2019. As follow-up to the SNF reform model released by CMS in May 2017, the agency proposes for FY 2019 an overhaul of the SNF payment system that would replace the current unit of payment known as "RUGs." CMS states that the proposed new "Patient-Driven Payment Model" is significantly changed from the version put forward last year. With regard to quality reporting, CMS also proposes to increase the number of years of data used to calculate two measures on Nursing Home Compare from one year to two to improve the validity of the results. The agency offers updates on the SNF Value-based Purchasing Program, including changes in scoring methodology for low-volume SNFs and an extraordinary circumstances exemption policy. These updates are estimated by the agency to result in a reduction of $211 million in aggregate VBP payments.