There has been a high volume of sales of skilled nursing facilities by nonprofit and government entities. What is driving these sales? What is causing the rush to the exits? Will this trend continue? In this blog, we will focus on non-government nonprofit entities only because the reasons for their sale of nursing homes differ significantly from the government privatization movements.
First, what is distinct about nonprofits? While wholly impartial and impersonal competitive market forces test, discipline and correct for profit entities, that is, supply and demand and profit, the birth and persistence of nonprofits are founded and subsist on a set of abiding beliefs and mission. They possess a strong conviction in their intrinsic goodness of serving those in need above generating a profit. This means that the marketplace feedback is secondary to the owners’ faith in their mission and the rightness of their cause (not that there is anything wrong with that). For profit-making entities, objective market discipline and economic law are coldly indifferent to beliefs and assumptions and they are sole factors that counts. Accordingly, as is taught in business schools – what is the purpose of the corporation? Answer: To increase shareholder wealth. Not to alleviate suffering or help humanity, but to increase shareholder wealth and the market objectively and impartially decides whether an entity realizes that goal through the business service or product it provides and whether profit is generated.
However, while profits have to satisfy their customers only, nonprofits have to satisfy their donors and society as well. Nonprofits have multiple and often conflicting objectives other than profit. They are subject to more public and non-market pressures. If their donors believe in the mission and continue to want to “do good,” then they continue to support the entity regardless of and sometimes against market realties and trends.
Within this context, what are the implications for nonprofits in pursuing mergers and acquisitions and nursing home sales? Because of their multiple objectives, defining, pursuing and reaching consensus on strategic alternatives is difficult. Thus, when in the sale mode, the vetting of potential buyers is critical, particularly if the parent organization will continue to survive. They cannot just put up a sign – “Nursing Home for Sale.” For a nonprofit, the sale is not only about the price and the buyer’s financial capabilities. Their precious brand name in the community is at stake and if the sale turns out bad, resulting in lower quality care or services, then their reputation will invariably suffer. This is particularly true for hospital systems: These are not “one and done” nursing home sales. If a nonprofit hospital or hospital system sells a nursing home, service area clients, for their core acute care business, will always associate the well-being of a sold nursing home with its previous owner. The sale will come back to haunt them and they do not want to be embarrassed in the future. Thus, in evaluating prospective buyers for nursing home sales, nonprofits always examine the sale from the bigger picture. Nonprofits care about the community and want to be assured that the buyer of their nursing home is a reputable and capable provider, with a track record for high-quality care, good employee and medical system relations and innovation.
Even more important, many nonprofit charitable organizations that own and operate nursing home have to confront the significantly higher compliance, competitive and capabilities challenges of today’s skilled nursing environment. Thus, their decision to sell reflects their diseconomies of scale and competitive disadvantages of being a single nursing home facility owner/operator coping with the ever-increasing amount and complexity of compliance, clinical, information technology and operational requirements that favor consolidation and scalability, possessed by chain skilled nursing facility operators only. This struggle extends to nonprofit acute care hospitals as well. While they may be experts in acute care, they too cannot generate the economies of scale in nursing home operations that a multifacility owner can. Moreover, as acute care providers, they often are a fish out of water because there are distinct and polar differences between running acute care hospitals and nursing homes effectively. By selling their skilled nursing facilities, the nonprofit can more effectively pursue its core mission, perhaps serving and helping its target community in a less demanding capacity.
This is also the fate of nearly independent single-facility for profit owners. They simply cannot cope with heightened compliance and capabilities requirements that are attainable by a chain operator only. This is not your father’s nursing home environment anymore. The economies of scale that are afforded to a chain operator are simply not available to a small operator. The only difference is the nonprofit takes longer to recognize these factors and trends because again, they are answer to a higher calling, not just marketplace discipline. But, I would argue, in the long-run, nonprofit or for profit healthcare providers cannot escape the same dismal laws of market economics.
In addition, unlike single facility nursing home owner operators, as an organization gets larger, the phenomenon of emergence takes over, whereby new skills and opportunities accrue that are not simply an additive result. In other words, Emergent properties are systemic features of complex systems which could not be predicted from the standpoint of a pre-emergent stage, despite a thorough knowledge of the features of, and laws governing, their parts. Again, in other words, the whole is greater than the sum of the parts.
In conclusion, expect more sale of nursing home from nonprofit organizations. In their read of the tea leaves, I believe that they have reached the capitulation to sell stage in their decision-making.