Update 1 September 2020

Officially summer is now over. I hope that you have all enjoyed it and are fully prepared for the opportunities and challenges of autumn. For this update we cover:

• Commercial mental healthcare provider signs multi-year contract with major health insurance company. Is this good news for ongoing M&A activities?
• Strong growth in nursing home capacity is required, but municipalities and laws make growth difficult. How can this be changed?
• Revenues up but profitability decreases for Dutch elderly care sector. How is he sector positioned for 2020?
• Banks prepared to finance investments in nursing homes but worries about cross subsidies between housing and healthcare activities. Are operators building sufficient reserves for upcoming investments?

HSK signs multi-year contract with leading healthcare insurance company

HSK is one of the largest commercial providers of outpatient mental healthcare in the Netherlands (see snapshot) with approximately 400 professional staff (psychologists and psychiatrists). HSK has recently signed a multi-year contract with Zilveren Kruis, one of the largest Dutch healthcare insurance companies. Key components of the contracts are goals related to quality of services provided, reduced waiting lists, and higher use of eHealth services. Zilveren Kruis has a stated goal that 10% of all care activities should be moved to a “home” situation.

Multi-year contracts are important to operators in the Dutch market as they provide financial certainty and a reduction of overhead activities related to bidding for annual contracts. In addition, a multi-year contract is a quality-indicator as it shows a high degree of trust from the healthcare insurance company. Earlier examples of commercial operators with such contracts are Mentaal Beter, Buurtzorg and Bergman Clinics. Insurance companies clearly see commercial providers as an integral part of the Dutch mental healthcare sector. This should be good news for ongoing M&A activities in the sector.

Strong growth required in nursing home capacity, but municipalities and regulations are roadblocks

In a report at the end of last year TNO (The Dutch Organization for Applied Sciences) stated that nursing home capacity in the Netherlands needs to be doubled in the period up to 2040. In a recent follow-up report TNO included the effects of four “mega-trends” (demography, technology, social relations, and healthcare system). Conclusions are similar to those of the previous report – a very large scale-up in nursing-home capacity is required. The report highlights that while 30.000 new beds are needed by 2025, only 13.000 are currently in the process of being developed.

A key problem mentioned by the TNO is finding physical locations (ground) where new nursing homes can be built. This point is supported by recent statements from Syntrus Achmea, one of the largest real estate investors in the Dutch healthcare sector. They have already invested €500 million in healthcare related real estate and claim to have another €300 million ready to invest. However, finding objects and/or projects in which to invest is extremely difficult.

A key reason for this is often municipalities who own and sell ground positions. Even though municipalities have a responsibility for providing sufficient and optimal living accommodations for their elderly population, they often choose to sell available ground positions to the highest bidder. This  results in untenable business cases for new nursing homes. Syntrus Achmea also mention regulations that sometimes forces operators who want to refurbish existing nursing home locations being forced by regulatory rules to sell these locations to the highest bidder, again making a business case for a new nursing home difficult.

Clearly changes are required both at the level of national regulations and short-term priorities being set by municipalities if the required nursing home capacity is to be built. How these changes are to be realized in unclear, but change is urgently needed.

Lower profitability in elderly care sector in 2019

In their annual overview of the elderly care sector Verstegen Accountants has analyzed the 2019 annual reports of 249 organizations mainly providing elderly care (covering both home care, assisted living, and nursing homes). The 249 organizations jointly stand for approximately 75% of the total turnover of the sector.

Total revenue in the sector increased by 7.7% to €14.1 billion through a combination of higher volumes, higher tariffs and extra quality-payments. However, the combined net result of the sector declined by 18% from €291 million to €239 million (return on sales (ROS) declined from 2.2% in 2018 to 1.7% in 2019). The main reason for the decreased profitability is higher costs related to personnel. This is to a large extent driven by the €2.1 billion in quality-payments, as these could almost exclusively be used to pay extra staff. Challenges in finding the extra staff is reflected in the 21% increase in spend on external staffing from 2018 to 2019.

In 2019 the elderly care sector invested a total of €670 million. This is a 3.4% decline from the previous year. Investments in ground and buildings shrunk by almost 18 percent in the same period. Some of the reduced investments may be explained by increased use of build-and-leaseback constructions but the low level of investments is extremely worrying given the forecasts by TNO.

Banks prepared to invest in new elderly care housing, but with reservations

During the last few years some of the reduction in investments in new nursing home locations by elderly-care operators could be explained by banks pulling back from the sector. However, in a recent interview, the Head of Public Sector and Healthcare at ING (one of the largest Dutch banks) is positive to financing new elderly care locations. He sees the urgent need for new locations, and therefore sees little financial risk related to occupancy rates.

However, he does have some caveats. First, he believes that operators need to stay close to their core business. If there is a need for a mixture of nursing home beds and apartments focusing on the needs of elderly people they are happy to finance the mix, but if the investment only consists of apartments (without or with only very limited healthcare services) the organization becomes a real estate company and needs to talk to other parts of the bank.

Another concern is that he sees many organizations cross-subsidizing losses made in their healthcare activities with profits made from the real estate activities. These “profits” are due to payments made to operators for room and board (typically €910/month) are higher than interest costs and depreciation. This problem is even more severe when (as is often the case) operators are still depreciating their properties over 30-40 years. The main consequence of this is that operators do not build the reserves they require for funding the replacement of current locations and the building of new locations.