ManorCare, ProMedica Offer Look Inside New Skilled Nursing Giant

December 4, 2018, Alex Spanko, Skilled Nursing News - The leaders of the $4.4 billion mega-merger between ProMedica and HCR ManorCare on Tuesday peeled back the curtain on their far reaching plans for the future, with a specific focus on using an in-house insurance plan to test ideas for expanded partnerships.

Speaking in friendly territory — the stage at new landlord Welltower Inc.’s (NYSE: WELL) investor presentation in New York City — ManorCare president and CEO Steven Cavanaugh and ProMedica president and CEO Randy Oostra offered their first joint look at their combined operations merger closed in July.

Cavanaugh in particular focused on gaining access to ProMedica’s in-house Paramount insurance plan, which offers both managed Medicare and Medicaid options.  Going forward, Cavanaugh said, ProMedica will use its experience with Paramount patients as a kind of “test kitchen,” allowing the skilled nursing provider to fine-tune new payment strategies internally before shopping them to the likes of Optum, Humana, and UnitedHealthcare.

“Now we have an opportunity to innovate and try new models, where we’re pretty much doing it with house money, doing it within our own organization.  If we have some success delivering models to get better outcomes and lower costs, that’s that something we can then take and export to other parts of our business,” he said during a panel discussion moderated by Welltower chief investment officer Shankh Mitra.

Cavanaugh also hinted at future skilled nursing collaborations outside of the merged companies’ shared footprint, which now encompasses 160 post-acute care facilities, 58 Arden Court-branded assisted living and memory care properties, and 13 acute hospitals.  Before the deal, ProMedica maintained its own post-acute arm that Cavanaugh described as a money-losing legacy operation; ManorCare now plans to help turn those buildings around to profitability, with Cavanaugh predicting that the operations team at his division can do the same for other acute-care providers.

“In a lot of systems, post-acute is an afterthought, and I tell everybody: One man’s trash is another man’s treasure,” he said.  “We’re very glad to try and step in and provide solutions for people on post-acute, and help them run that part of their business better.”

Why did they do it?

The Toledo, Ohio-based Welltower and ProMedica shook the long-term and post-acute care worlds earlier this year when they announced the deal to save the struggling ManorCare, which had filed for bankruptcy after a long 2017 of missed rents and an eventual default on its lease with former landlord Quality Care Properties.  Under the terms of the acquisition, real estate investment trust (REIT) Welltower teamed up with ProMedica to buy the real estate from QCP in an 80-20 joint venture; in a separate but related transaction, ProMedica bought the operations of ManorCare, also based in Toledo.

The beginnings of the deal had been stirring for at least the past five to six years, according to Cavanaugh and Oostra, but what pushed the non-profit hospital provider over the edge was a desire to break down the barriers between care settings within a single network.

“The more we looked at it, we embraced this as what we believe is really going to be this future platform in how we’re going to deliver health care in the future,” Oostra said.

For instance, Oostra noted that a resident who goes from the hospital to a skilled nursing facility or a home-care setting won’t think of him or herself as a “post-acute patient” — instead, patients are individuals who should be cared for in the setting that provides the best care at the lowest cost to payers.

“The worst label is ‘post-acute care.’  Do you want to live in a post-acute care world?  I don’t,” he said.

The combined ProMedica-ManorCare will be more agnostic when it comes to seeing specific settings as “feeders” for residents, with Oostra pointing out that the current trajectory of hospital to SNF to home may not apply in the future.

“I think we really need to be careful about labels and how we think about labels, because I think the minute we do that, we proscribe what they’re going to do,” he said.  “Skilled nursing facilities could be very, very different in the future.  Basic home care could be very different in the future.”

But the sheer geographic scale of the deal also played a part in ProMedica’s calculus: The transaction saw the hospital provider expand from a regional health system in Ohio and Michigan to a nationwide player essentially overnight.

“There was no way we could get to 30 states with any other transaction,” Oostra said.

Shared savings

The headlines in the wake of the transaction haven’t been all positive: ProMedica received downgrades from multiple credit ratings agencies after picking up ManorCare, with analysts expressing concerns about the long-term viability of the post-acute care space, as well as the $1.15 billion in debt that the hospital system took on in order to consummate the deal.

But Cavanaugh predicted that the combined company will see $100 million to $150 million in shared savings.

“When you start adding all those things up, there’s a real opportunity on the cost side to really drive costs down, drive overhead down,” Cavanaugh said.

From ManorCare’s perspective, the benefits of the deal also extend to a simple capital infusion for the chain, which Cavanaugh characterized as operationally sound but financially shaky — a sentiment that Welltower CEO Tom DeRosa frequently expressed while the deal wound its way through the approval process.

“These are very good assets — great real estate that’s been run by a very effective management team with one hand tied behind its back because they’ve been capital-starved,” DeRosa said during a presentation at the National Association of Real Estate Investment Trusts’ annual REITweek conference in New York City back in June.  “This is a very important transaction, because this company, HCR ManorCare, is essentially being rescued by ProMedica and Welltower.”

In its previous incarnation, ManorCare had been owned by private equity giant The Carlyle Group; a recent article in the Washington Post highlighted the struggles that the provider had experienced under its former ownership.

With a stabilized financial backing, ManorCare can look ahead to incorporating some of the ancillary benefits of the ProMedica partnership, such as its team of more than 1,000 physicians and existing telehealth infrastructure.  ManorCare has already set up a telehealth pilot with ProMedica’s vascular institute, focusing on wound care, and Cavanaugh sees potential in expanding the program to target higher-acuity residents.

“This is a way for us to take the capabilities that ProMedica has and overlay that in our setting, and then that hopefully lets us take sicker patients,” he said.

Welltower’s busy day

The presentation wasn’t the only news Welltower made during its investor presentation.  The REIT kicked off the morning by announcing $1 billion in investments outside of its skilled nursing assets, including a $725 million play for four senior housing transactions, and $280 million in medical office buildings; the latter deal includes 75% ownership in a pair of properties under development in Charlotte, N.C. to be operated by Atrium Health.

Welltower also announced a $300 million infusion from an affiliate of the Qatar Investment Authority, the sovereign wealth fund of the Middle Eastern nation.  The common-stock purchase comes with the option to for the QIA to buy an interest in a senior housing development pipeline.

“QIA, one the world’s largest sovereign wealth funds, shares our vision regarding the importance of this asset class in improving outcomes and lowering the costs of health care delivery and we look forward to a long and mutually beneficial relationship,” DeRosa said in a statement announcing the cash infusion.

Welltower’s stock closed Tuesday’s trading down less than a percentage point, finishing the day at $72.13 per share.