How real markets function always fascinates me. Whether the behavior of real markets diverge from or substantiate economic theory is the pressing question. In this case, I want to apply economic theory to better understand the active sale of standalone and independently-owned skilled nursing facilities, which is resulting in the extinction of the standalone and independent for profit and nonprofit skilled nursing facilities and corresponding consolidation.
The basic tenets of capitalism rest on four principles:
- Private Property Ownership – Persons or corporations or other legal entities own the means of production and distribution of goods and services.
- Profit Motive – Owners and stakeholders direct their efforts to increase shareholder wealth; in order words, avoid loss and make a profit.
- Competition – To succeed over rival economic actors, companies seek to gain advantages through lower the cost of production or goods and services, improving quality or fulfilling an untapped demand or need.
- Price System – Supply and demand determines the price of goods and services.
- Free Enterprise – Businesses are free to choose any business to operate and run it as they wish. This value originated out of a historical evolution from feudalism and the divine right of kings to an open society favoring individual rights and individual liberty.
While we can discuss the applicability of all five principles above to the healthcare system in the U.S., perhaps in another blog, it is the notion of free enterprise that I wish to discuss in the context of understanding the active sale of standalone for-profit and nonprofit skilled nursing facilities. Although the term “free enterprise” is also used to loosely describe the capitalistic free market model as a whole, I wish to discuss the concept of free enterprise in its narrowest terms. Strictly speaking, “free enterprise” means to conduct your business as you wish…..without undue government interference.
Within this narrow meaning of free enterprise, do skilled nursing and even assisted living facilities operate according to a free market model? Of course not, they do not. In fact, in the operation of skilled nursing facilities, nearly, if not all aspects of the services provided are subject to regulations, inspections and enforcement. There is not an aspect of the operation of skilled nursing facilities that is not regulated. In fact, the regulations governing nursing, clinical, food services, building, medical records, medical services, therapy, pharmaceutical services, patient rights, etc. are at such a level of minutia detail, that the government is micromanaging every scintilla of activity that occurs in a skilled nursing facility. When you step back and let that thought resonate, understanding why single-site skilled nursing facilities are being sold is easier to comprehend.
Standalone single-site operated skilled nursing facilities and senior housing in today’s market, are less able to possess the level of operating and professional capabilities to comply with regulations. The independent operator is simply overburdened by the crushing and oppressive weight of regulations. Thus, the sale of independent skilled nursing facilities is driven by a flight from compliance. Single site skilled nursing facilities cannot cope with ever-increasing amount, scope and complexity of compliance requirements that favor consolidation and reward economies of scale, possessed by multifacility operators, only.