LeadingAge Magazine · September/October 2015 • Volume 05 • Number 05

Partnerships to Survive and Thrive

September 13, 2015 | by John Mitchell

As the structure of American health care—and the market forces affecting providers of long-term services and supports—evolves, affiliations and mergers become more important to the survival of some providers.

For any provider that is contemplating a new partnership through a merger or affiliation, David Smeltzer offers some vital advice based on his own recent experience.

“A merger can either happen in your control or out of your control. Don’t wait until things get bad to try to find a partner who shares your values,” cautions Smeltzer, president and CEO of Heritage Ministries, Gerry, NY. He has worked on recent affiliation projects to keep two retirement communities, in New York State and Seattle, Christian-based and not-for-profit.

“I encourage any retirement community with less than $15 million in operating revenue a year to start seeking out potential merger or affiliation partners,” he adds. “It takes insight and courage for a board to act proactively.”

Bold moves are indeed the order of the day for affiliations and mergers, according to Dan Hermann, senior managing director and head of investment banking at Ziegler, a leading financial underwriter for not-for-profit senior living providers. According to Hermann, new merger and affiliation partnerships between continuing care retirement communities (CCRCs) are reminiscent of a situation that developed in another sector in the early 1990s.

“Retirement communities are now being driven by the same trigger points, minus the intensity on the payer side, that hospitals were experiencing 20 years ago,” explains Hermann. “The CCRC market sector is experiencing classic market maturation and there is not much new development occurring, which peaked in the 1980s. Stand-alone communities need capital to modernize, including adding new information systems. In local and regional markets, bigger—at least 50% of the market—is better, and more efficient to manage.”

According to Ziegler, using figures published in the annual LeadingAge Ziegler 150, the single-site provider trend among CCRCs, assisted living and/or independent living communities, and nursing homes is to join larger systems. From 2010 to 2015, Ziegler counted 48 such new not-for-profit to not-for-profit affiliation partnerships. Yet such mergers represented only about 21% of transactions. The vast majority—64%, or 129—of such transactions were not-for-profit to for-profit events. Affiliations, which are most common, generally allow the joining organization to keep its name, identity and board. An outright merger folds the joining organization into the identity, name and governance of the parent organization.

An affiliation agreement finalized in February between Cathedral Village, Philadelphia, PA, and Presbyterian Senior Living, Dillsburg, PA, is an instructive example of a new partnership done for the right reasons. First and foremost, the deal was culture-driven, according to Cathedral Village board member Bill Scott.

“The not-for-profit, faith-based history of both organizations provided a foundation of shared values that was reassuring to residents and staff alike,” says Scott.

He says the affiliation agreement, which designates Presbyterian Senior Living as the sole corporate parent organization of Cathedral Village, has brought a fresh infusion of expertise to Cathedral Village. This includes innovations in marketing, both for independent living and skilled nursing, and more sophistication in reimbursement for their nursing and rehab services.

“Also, the availability of financial support, if needed, will help us obtain the capital needed to improve our campus,” says Scott.

“I had a high opinion of Presbyterian Senior Living from previous work I had done with them in my law practice. So when they were on our list of possible merger partners, I was delighted,” adds Scott. “We did a lot of due diligence and things could not have gone smoother.”

According to CEO Stephen Proctor of Presbyterian Senior Living, which operates 30 locations in Pennsylvania, Delaware and Maryland and is ranked 11th on the LeadingAge Ziegler 150 list of not-for-profit, multisite senior living organizations, the affiliation was done for the right reasons.

“Many freestanding communities seek out affiliation or merger out of desperation,” he says. “But in this case, the board saw the risk and uncertainty environment. Bill’s foresight was really remarkable. With Bill’s leadership and experience, he could tell that we had the organizational strength and resources they needed.”

Proctor stressed that reaching the affiliation agreement with Cathedral Village was remarkably quick—about 90 days from first meeting to signing. On his end, he pointed out that the information technology (IT) platform they offer was also a point in their favor.

“A lot of places struggle with the IT,” Proctor explains. “We have developed an IT platform, Prelude, [in our] IT partnership with Diakon Lutheran Social Ministries, specifically for senior care.”

In the past few years, Smeltzer negotiated two affiliation agreements for Heritage Ministries on opposite coasts, in upstate New York and in the Seattle area. He relied on close-knit contacts in the CCRC community for financing and other support services (including LeadingAge, he says) to get these new partnerships completed; many share in the credit for these successes.

“The bottom line is all of the connections, chance meetings, introductions and previous deals laid the groundwork for some 80-plus elders at Vinecroft [Clarence Center, NY] and some 200-plus elders at The Kenney [Seattle, WA] to continue to be cared for in an environment that puts faith and people ahead of profits,” says Smeltzer. “All of these elders would have lost their entrance fee investments, and quite possibly their homes, if Heritage had not been able to come along side these two organizations and provide the stability they each needed.”

LeadingAge Thrive provides resources to help members better serve seniors and their communities. The seven major topic areas in Thrive include questions designed to stimulate discussion among your leadership team and board of directors. Thrive also includes resources such as white papers, articles, tools, presentations and business intelligence.

Under the “Governance” section of Thrive, see the resources connected to these questions:
  • Do we have an active, ongoing strategic plan and planning process to identify needs we have a responsibility to address, as well as things we should stop doing or that others could do better?
  • Do we have basic governance policies and procedures in place that ensure we are meeting our legal obligations as stewards of the organization’s mission and resources?
  • Do we stay abreast of contemporary trends and issues?
  • Do we have dashboards we monitor regularly about mission performance, including the health of our culture, the satisfaction of the people we serve, our reputation and service quality?

Under the “Strategic Partnerships” section of Thrive, see the resources connected to these questions:

  • Do we engage in partnerships and collaborations with other organizations to study, develop and offer new service/care models and practices to improve the quality of aging services and care?
  • Is our organization aware of its role as a post-acute/long-term care organization with respect to participation in an accountable care organization (ACO) and are we aware of how to position our organization for a future of integrated health care?
  • Do we pursue business ventures with partners that have the knowledge, expertise and capacity to improve the services we provide to residents and clients, or services that support our organization?
  • Are we receptive to exploring a partial or full affiliation or merger if it would ensure that our residents and our clients would continue to receive the care and the services they need?

Under the “Strategic Planning” section of Thrive, see the resources connected to these questions:

  • Do we have a process to regularly and rigorously assess internal core competencies as well as external market opportunities and threats?
  • Do we have clearly defined goals to inform strategic and operational decision making?
  • Would you say your organization understands the needs, competition and the overall markets in which it operates?
  • Do we have a “roadmap” that lays out responsibilities of staff to execute activities/tactics to support the strategic plan?
  • Do you feel you have the right leadership in place for your future’s success?
  • Do we engage in partnerships and collaborations with other organizations to study, develop and offer new service/care models and practices to improve the quality of aging services and care?

Thrive is a LeadingAge member benefit, and access is limited to members. Use the MyLeadingAge login page to log in or create an account.

Visit the Thrive main page.

In addition to meeting the mission so vital to the not-for-profit CCRC community, there are other lesser, but genuine, drivers for the acquisition and merger trend. Hospitals and health care systems are among the few providers opening up new stand-alone post-acute sites, according to Hermann, although they prefer to find local CCRC partners. This development reflects the impact that the Affordable Care Act (ACA) is having on the CCRC community and its mission. Both hospitals and CCRCs are being held accountable to more transparency and outcome metrics. According to Lisa McCracken, senior vice president of senior living research at Ziegler, this can be observed in naming trends.

“Of the CCRCs on the LeadingAge Ziegler 150 list, 53 have dropped the word ‘retirement’ from their name in the past 11 years,” says McCracken. “I think this trend reflects the future of senior living and the broader services that providers now have to offer.”

Scott Townsley, principal at CliftonLarsonAllen, who advised on the Presbyterian Senior Living/Cathedral Village affiliation, has seen a lot of interest from hospitals in the past year in partnering with retirement communities and other senior living organizations.

“After the Affordable Care Act was passed, hospitals and health systems didn’t appear to have much interest in partnering with retirement communities and other senior living organizations. But I saw that change about a year ago,” Townsley says. He notes, for example, with bundled payments now being tried for hip and knee replacements and with readmission penalties now a fact of life, hospitals realize they have to find partners to help with post-acute care outside of their four walls, which is not a hospital’s strength.

Proctor says the ACA is not a primary driver of CCRC affiliations, but it is a secondary factor.

“It is an advantage to create a bigger package of services in a market, including post-acute care. At Presbyterian Senior Living we now have nearly 3,000 apartments and 140 skilled nursing inpatient beds,” notes Proctor.

Hermann agrees the ACA is a factor as CCRCs consider their roles in a landscape that is being redefined by the law. He says that when the ACA went into effect, hospitals had a host of internal issues they had to first deal with, such as improving patient outcome quality measures, recruiting doctors and negotiating their own mergers.

“The response from the hospital to the CCRCs was ‘We’re busy right now, but we’ll get back to you,’” Hermann explains. He says that 9 out of 10 times that does not involve purchasing a CCRC, but negotiating a working partnership. And hospitals prefer post-acute partners who can bring a large network to the table.

Hermann also says that to a lesser degree, the demand for good leadership among CCRCs is also a factor in affiliations and mergers. While there are dozens of hospital administrator programs in the country, there are only 2 retirement community advanced degree programs.

“There is a large body of retirement community administrators aged 55 to 67. Usually in an affiliation or merger, you have a good pick of experienced leaders and the move often aligns well with the retirement plans of some of the current leaders,” he notes.

All the sources interviewed agreed that mergers and affiliations are accomplished for mostly the right reasons. That’s why at one year post-partnership, many of the financial goals that prompted the changes are accomplished.

“My take is that bad affiliations generally don’t happen. Barring a situation where there are 2 days cash left and payroll is due, both sides take the time to do their due diligence to avoid bad matches,” says Townsley. “Neither side wants to be disruptive to their residents.”

This year’s LeadingAge Annual Meeting and Expo, scheduled for Nov. 1-4 in Boston, MA, will feature more than 190 educational sessions on a wide variety of topics that challenge our field.

Click on “Education Program” at the meeting website to learn about the many forms of education available, investigate specific sessions or download the whole meeting brochure. Here are some of the sessions related to topics in this article:

Sunday, Nov. 1

  • 201-A. Negotiating Agreements for Highly Collaborative Relationships

Monday, Nov. 2

  • 202-B. Health of the Not-for-Profit Aging Services Sector
  • 67-C. Scenario Planning: 2030 and Beyond

Tuesday, Nov. 3

  • 70-D. Affiliations and Mergers: A Strategic Opportunity, Not a Last Resort