The nonprofit health system's CEO talks about the acquisition of the nation's second-largest post-acute care company and expectations of surging demand for long-term care and home health services.
ProMedica Health System President and CEO Randy Oostra spoke with HealthLeaders Media about the Toledo-based health system's $3.3 billion acquisition of HCR ManorCare in a joint partnership with Welltower, the real estate investment trust.
The following is a lightly edited transcript.
HLM: What makes this a good time to acquire HCR ManorCare?
Oostra: Like most systems, we are looking at the future and all the disruption going on, and you realize a lot of the lines are blurred between what we have traditionally done.
We are in a non-growth market. How do we grow as a system? How do we begin to diversify? We have a health plan, we have hospitals, we have a physician group. Being more diversified in this space made sense.
Then you look at the trends, whether it’s the number of 85-year-olds, or the numbers of people who are going to get Alzheimer's, home health numbers, hospice numbers, etc. You see all this massive growth, but the people moving in that space are venture capital companies.
The more we talked to ManorCare as they were going through their issues, it made a lot of sense. It went from an interesting idea to "why didn’t we do this before?" Plus, they are a locally based company. It gives us scale and opportunities that we hadn't had before.
HLM: Is ProMedica venturing into post-acute care because of the demographics pressures, or because you anticipate a change in the way care is delivered to seniors?
Oostra: It's both. Not many Baby Boomers want to go to a hospital. They want to stay home. Who is going to develop those services? Why wouldn't that be hospitals? The expectations are going to change, so as we delivery these services we are going to have to change as well. It's exciting to think about, this blurring of the lines.
HLM: Did you buy ManorCare because it was bankrupt, or were you looking to move into post-acute services beforehand?
Oostra: We started discussions two or three years ago, before their more recent issues. We did a partnership on one of our campuses here in Sylvania, Ohio. They have a Heartland facility on our Flower hospital campus. We began discussions even back then that maybe we ought to work together and maybe you ought to be a nonprofit. Their initial reaction was "are you people crazy?"
ManorCare is one of the best operators in this space in the country. We think there are opportunities to get more efficient. We think there are ways to get together through telehealth and urgent care through our physician group, maybe exploring some options with our health plan.
Overnight we went from a $3 billion system to a $7 billion system, from 17,000 to 70,000 employees, from facilities in five states to 30 states. We put a lot of emphasis on the skilled nursing piece, but there are other pieces. The home health piece, assisted living, rehab and hospice pieces are incredibly profitable. We have some ideas about how to grow that.
When we look at what we were able to structure on the SNFs with Welltower, the reduction in lease rates, the balance of what we are able to provide with our current system and the growth in other areas, we became comfortable that in a short period of time we can drive that 3% to 4% operating margin on a larger scale, and that is how we got comfortable that this was a great strategic step for us.
HLM: ManorCare was in Chapter 11. What will you do differently to make it profitable?
Oostra: Right now, with everything from sales taxes to real estate taxes, we've done a fair amount of research on how to convert to nonprofit status. We are fairly proximate to one another. In a $7 billion company there are some great opportunities for synergies. Also, the lease rates we will be paying are significantly lower than they were paying in the past. It only takes a couple of those factors to turn them profitable.
In some ways this is not that different as when hospitals merge. You have to look at the same areas, the same management services.
HLM: ManorCare has a significantly larger footprint. How will you coordinate care in outlying facilities that might be several states away from your Ohio base?
Oostra: In some of the states where they have a smaller footprint, maybe we will exit certain markets. In each case we will look at what we can bring that's consistent with our system and in other cases we will partner locally. It's going to be on a one-by-one, market-by-market basis. As we work over the next year those are the things we'll look at.
HLM: What is the status of ManorCare under ProMedica?
Oostra: They are fully part of ProMedica. They will be one of our divisions. They will be our employees. We will own 100% of HCR ManorCare. On the real estate side, we will own 20% of the real estate in a joint venture with Welltower. HCR will be fully integrated in our system.
HLM: Are you in uncharted waters with this acquisition?
Oostra: I hate to say we are in uncharted waters here, but it seems to be a unique, first-of-its-kind partnership. A nonprofit health system, a large post-acute provider and a real estate investment trust as partners is unique.
This is different from other deals we've done where you talk through mission, vision, values and culture and then you come to the business model. This was all about the business model, and it had to work because of where they were with this bankruptcy. It's the opposite of what we’ve done in the past, where you build up to the financial model and that's toward the end. This was first, and this was all about the economic model. Does it work? Can we exit bankruptcy?
But, we know ManorCare and Welltower. We are confident that we will figure out some of the other stuff as we move along.
HLM: With this acquisition, you will more than double in size. Are there any particular areas in this deal that you view as potentially problematic, and what are you doing about it?
Oostra: The fear is the fear of the unknown. We are all at the mercy of reimbursements. I don't think the post-acute world can face further reimbursement cuts, especially when you see what's happened in the past. That's the sort of thing we worry about the most.
We are comfortable that we can operate and grow, unless something further happens to devastate the financials of skilled nursing facilities.
On the other side, the home health, hospice, assisted living, rehab, memory care, those are all more profitable and if we can grow those while managing the skilled nursing at a break even or better margin we are going to be fine.
HLM: What metrics will you use to determine if you're succeeding?
Oostra: Right now we are taking a hard look at quality and safety. We would look at many of the metrics for performance in the nursing home world. We're looking to grow, so financial metrics are important. We talk about balancing out between skilled vs. nonskilled. We will be cognizant in growing in some of the nonskilled areas to balance out the financial portfolio. Those are the first pass metrics.
HLM: Are you nervous about being in the vanguard?
Oostra: We talk a lot in healthcare about how we need to change, how we need to disrupt. But some of the people who would say that would be the first people who will criticize us for doing this. We are in a non-growing market. We have to think nontraditionally.
For most of our careers, once you left the hospital, good luck! We didn't pay attention until it hit our finances and all of a sudden we were worried about readmissions. We look at this as the next step. If we are going to care for all these people beyond our traditional hospital walls, why wouldn't we move into that space? Why wouldn't we do it quicker and why don't we move in even more. It makes sense to us.
John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.