You are here: Home » Reuters » News
Business Standard

Focus: A bid to save $300 million at HCR ManorCare, and disrupt U.S. healthcare

Reuters  |  CHICAGO 


CHICAGO (Reuters) - is making a $4 billion bet that he can build a national, low-cost network for America's aging population that will succeed where so many other models have struggled.

His secret: strip out the "for-profit" business model, and leverage the in homes for outpatient care.

DeRosa's strategy starts with buying out the property of the huge bankrupt home chain HCR ManorCare, and teaming up with a non-profit hospital operator, ProMedica, to create a 30-state system.

His own company, investment trust Inc, is purchasing the for $2.7 billion under a deal unveiled April 24 and awaiting approval from a U.S. bankruptcy court.

is buying ManorCare's operations for $1.3 billion and combining them with its own centers, clinics and plan to form a network with $7 billion of annual revenues and 70,000 employees.

"This is about a system moving into a beleaguered sector of healthcare," DeRosa told in an interview. "We're breaking down the wall of what has traditionally been and services for the aging."

The aim is to strip out $300 million in costs from the operation, mainly from cheaper rent, once HCR emerges from its Chapter 11 bankruptcy this year, according to interviews with and executives.

expects the merger - which will propel the group into the 25 largest U.S. systems by revenue alongside names like Mayo Clinic, Geisinger and Johns Hopkins - to boost margins by two percentage points to between 3 percent and 4 percent over the next few years.

ProMedica will also invest $400 million to revamp ManorCare's facilities, and size up every site as an opportunity for different services or partnerships.

And by turning non-profit under ProMedica's existing business model, will see other annual cost savings of $30 million.

"It is a disruptor," Arthur Caplan, at the New York of Medicine, said of the deal.

Yet the merged group must still overcome a perfect storm of eroding reimbursement rates, depressed occupancies, and competition from home health that has weighed on facilities nation-wide.


The proposal comes at a time when companies from and pharmacy chains including Corp and to and retailers like Inc and are jostling to create new for an aging population as U.S. medical costs continue to soar.

Outside the health sector, has joined forces with and for a new model to help bring down

REITs, including Welltower, invested heavily in skilled nursing centers at the turn of the decade but have struggled to collect, let alone raise, rents. Large REITs like have since abandoned the sector. For a graphic, click hospitals, declining payments by - the largest payer for the 65 and over population - and declining admissions are driving a search for lower cost, non-hospital settings to deliver care, Oostra said.

penalties for patient readmissions are also forcing to follow up on recoveries, which often occur at a skilled nursing facility.

"Increasingly we're getting more focused on things that go on outside of our walls," Oostra told He calls it a "blurring of the lines" in where clinical care starts and stops.

Enter HCR ManorCare, which in March filed one of the largest bankruptcies this year, dragged down by debt from private equity fund Carlyle Group LP's $6.3 billion buyout in 2007 and unable to keep up with $450 million in annual rent payments to REIT landlord Quality Care Properties Inc.

Under the new structure, DeRosa plans to capitalize on the trend of more healthcare taking place outside of This could mean basic like hip replacements or being provided directly in a skilled nursing center instead of a hospital.

For a person who traditionally would have recovered from knee or hip in a skilled nursing facility, they may now receive more outpatient rehab or home health.

already covers and has a pilot program that allows patients to receive care directly at a skilled nursing facility without prior hospitalization, as is the case currently.

"Medicare is testing this out and this is where people think healthcare is ultimately going and they want to be skating in that direction," said Chas Roades, of Washington D.C.-based consultancy Gist Healthcare.

Roades said the deal with ManorCare, expected to close in the third quarter, is the first bet by a major health system on the post-acute space.

will own 160 skilled nursing and 59 assisted living and memory care centers run by ManorCare through a 80:20 joint venture with ProMedica. ProMedica will own ManorCare's home health, hospice and outpatient rehabilitation businesses.

If the U.S. bankruptcy court approves the deal, ManorCare's rent will fall by 60 percent to $180 million in the first year of a 15-year master lease, with lower annual bumps than its previous lease, according to court filings.

Welltower estimates an 8 percent cash yield from the deal.

"This is the way we'll start to drive some of the services that this aging population will need," DeRosa said, adding that it gives the distressed skilled nursing industry a chance of "rebirth."

"I think it's going to make other stand up and take notice."

(Reporting by Tracy Rucinski; editing by and Edward Tobin)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Tue, May 15 2018. 16:47 IST