• Posted on September, at 19,

    Meet George V. Hager Jr., CEO of Genesis HealthCare, based in Kennett Square, Pennsylvania. The company started in 1985 as Genesis Health Ventures, led by Michael Walker. Today, Genesis runs more than 440 centers across 30 states, offering care services in both short- and long-term as well as care for Alzheimer’s and both assisted living and independent living.

    TECHNOLOGY

    I’m curious about what technologies you see as promising and worth investing in, specifically technology as it might change or enhance the resident’s experience.

    This industry has been in financial distress on and off for a couple of decades. I think you know that every state chronically underfunds the cost of providing care. It’s a challenging business model when you effectively lose money on 70% of your customers. Therefore, what you haven’t seen is a lot of investment of technology firms into providing innovative technology into this space. It’s a challenge, I would say, compared to our brothers in the acute care world.

    I think for us, we want technology that can improve communication up and down stream in the continuum to have a more coordinated and efficient and effective care-delivery process. We have a long way to go. You’re starting at almost ground zero and there are so many different systems that the hospitals use that we use. PointClickCare has become the dominant technology package, and we were the first to engage PointClickCare.

    We probably engaged with them immediately after we spun off in the ’04, ’05 timeframe. I had a diligence team that we took up to PointClickCare in Toronto and it was bigger than the staff of PointClickCare. They’ve come a long way — great company, great leadership, but once again it just shows you that this industry has been underinvested from a technology point of view.

    Hager came on board in 1992 when Genesis was worth $200 million. During his tenure at the company, including as CEO starting in 2003, the company has grown to $5.4 Billion as of 2017, with approximately 70,000 employees. We sat down with Hager to learn how he helped steer Genesis out of bankruptcy, what advantages national operators have over local ones in skilled nursing, and why Genesis’ long-tenured management team is so important to the company’s success.

    Tell me about how you got your start in health care.

    I went to college at Dickinson, and my primary interest at that point in my life was basketball. I graduated in May of 1978 and immediately enrolled in business school in a great program designed by what was then the “Big Eight” public accounting firms. I finished with my business degree in August of ’79 and started with Peat Marwick Mitchell, now KPMG, in the area of public accountancy. I was a CPA starting in September of 1979.

    The way the public accounting world was configured in the late ‘70s and ‘80s was that they wanted us to specialize. Typically, they wanted you to have two areas of specialization, and the reason for that is that business is seasonal. Your large corporate customers or clients typically had December 31st year-ends. Your busy time in those companies’ audits was around October through February to March, but you needed to stay busy for the spring and summer. Many of the colleges, universities and health care entities, especially non-profit entities, had June 30th or September 30th year-ends.

    My big clients were a Philadelphia-based company called IU International, which is one of the old traditional conglomerates, and Independence Blue Cross, which was the large Blue Cross plan in Philadelphia.

    My interest in health care developed out of a need to specialize, and I chose health care as my sort of all-season specialization. For my experience here at Genesis, it proved very valuable because I saw all aspects of health care in that early part of my career. I saw the large health insurance and managed care plans as they developed and grew. I also worked with clients like Temple University Hospital, which is a large academic acute-care system.

    In 1985, Mike Walker founded Genesis HealthCare with the September 30th year-end. I also had the Visiting Nurses Association of Philadelphia and the largest home care provider. I had the great fortune of seeing, experiencing and understanding the systems and the relatedness of all aspects of the health care delivery system.

    Did you then transition from KPMG to Genesis?

    I became a partner with KPMG in 1989. The partner in charge of health care, literally, the day I became a partner July 1 of 1989, decided to leave the firm. He became the very successful chief financial officer of Independence Blue Cross, one of his clients.

    Even though I was a new partner at that point, I was the most experienced health care partner, so I was placed in charge of the health care practice for KPMG in Philadelphia in July of ’89.

    Wow. So it sounds like that departing partner had been a mentor to you? Tell me who he was and how he mentored you. What was that relationship like?

    His name was John Foos, and he was like me, with similar interests. He was a sports guy who was also a small college guy. He went to Susquehanna College, not too far from Dickinson College. Blue collar guy. Worked his way up to become a very successful partner.

    Back then, health care was not an area that people wanted to go into, at least in the audit and finance world. The reason is that a lot of the work being done by the audit advisory firms was around reimbursing systems.

    The health care reimbursement systems then were all cost-driven. Not only did you have to have the broad understanding of generally accepted accounting principles and generally accepted auditing standards and be able to do a traditional audit, but you actually had to have a specialized expertise in the cost reporting which drove the revenue and the reimbursement for most providers in the health care system.

    John Foos helped me understand and create a career opportunity. In public accounting, the pyramid gets pretty thin. You start with 40 or 50 in your class, just in the Philadelphia office, and at most two will make partner, though more likely one or zero. I had a goal of becoming a partner, so he was very instrumental in helping set my career path.

    You were then thrown right in the deep end, taking over the health care practice. I imagine that might have been a key test for you and your career. Were you nervous?

    I think I was more nervous at just becoming a partner. It is a big step in your career. Your compensation was a percentage of the profits of the firm. That was a whole different way of being compensated, and for the first time in my life, I was also tasked with the responsibility of growing the practice. Not only did I have a responsibility to take care of my existing clients, I needed to grow my client base.

    As a new partner competing against partners in other firms who had significantly more experience than I did, it was a challenge. I think I did well. It was 1989, I was 33 years old, and I was a partner in a major firm. So it was challenging but it was a great opportunity. I embraced it.

    How did the Genesis opportunity come up? Can you talk through your decision to join this company?

    Mike Walker founded Genesis in 1985, and I’ve been involved with Genesis for a long time doing the audit, advisory, and M&A consulting services because a lot of what Mike did was growth through acquisition. He built a business. It was founded by the acquisition of just 11 nursing homes July 1 of 1985. I stayed involved with the company obviously, and when I became a partner in 1989, Mike was building a very nice business. When I joined Genesis in July of 1992, the company was a little less than $200 million top line company, but it was publicly traded on the Nasdaq at that point.

    In 1998, as I said, the reimbursement systems changed. There were seven multi-billion dollar public companies, and five of them filed for bankruptcy. We were the last of the five to file, and to this day not all of those companies ever came out of bankruptcy. But we reemerged as a public company.

    Obviously, the radical change in reimbursement and the impact on the industry could not have been anticipated, but it also taught me a valuable lesson around leverage and how to manage and plan to deal with what can be very significant down cycles — which we are experiencing today, as a matter of fact.

    I think managing a very complicated restructuring and getting the company back out as a public company in 14 months was a great success, even though no one wants to go through that process. It was a time that let us take a breather from what was a very significant growth period in the prior six or seven years. I was able to reflect on the things we needed to do to be a better company coming out.

    In 2003, Genesis spun off the pharmacy division. What was your thinking at that point about taking on that CEO role? Did you see it as more of a risk or an opportunity?

    Like any spin off, we still had a lot of challenges coming out of the restructuring, and obviously there is a tremendous amount of disruption when you split a multi-billion dollar company. We found ourselves as a management team with challenges around infrastructure technology. We were under-invested in our nursing centers and the real estate and we had too much leverage at that point, which is not typical in spin off transactions.

    More from the Leadership Series

    We had a lot of challenges, and as a management team with support of our board, we invested in training education of our clinical staff, in our real estate and in our technology.

    2007 was another magic year in the company’s history, as we invested close to $400 million in our real estate and in our technology platform. All of that was internally generated cash flow. We were very, very focused in operating the business as well as we could, in having good outcomes for our patients and taking any profits and reinvesting them in the business.

    We were very bullish on the industry as we are today long term, and felt that investment would pay off. It wasn’t hockey stick-type growth, but those investments paid off and what we produced was very steady and consistent growth in our business.

    LEADERSHIP

    On the one hand, it seems like there are so many different iterations of the company and so much change over the years, but there’s also stability in the form of your leadership. So I guess the big picture question is, how do you define leadership? Are there guiding principles that have remained the same and helped you keep your  bearings through all these changes?

    Everyone has a different management style, leadership style, and in different circumstances, all of them can be successful. I would say my management style is an inclusive style, team-building style. I mentioned to you that my passion in my youth was basketball. I played basketball through college, so I’m a team guy. I’m not an individual sport-type of guy.

    This industry, make no mistake about it, has gone through some very challenging times. From 1998 to 2003, we went from cost-based  to prospective payment. We’re in a very challenging time right now, with some of the reimbursement changes that occurred in 2011 and 2012, and then now, the impact of health care reform. I’m a big fan of health care reform. I’m a big fan of changing the fundamental incentives in the health care system today, having them be more focused on outcomes. But with those changes come challenges.

    Without strong, stable leadership, managing those challenging times would be virtually impossible. That’s why today, if you look around the skilled nursing space of those seven companies that were around in 2000 and 2001, we’re the only ones left of any scale.

    I would say the differentiator is our management. When I get up and speak publicly and speak internally, one point I like to make to anyone who is willing to listen is, even though I’m here 26 years, I am one of the least tenured members of our senior management team. We have enjoyed tremendous stability in an industry where turnover both at the facility level and at the executive level is very, very high — above norms in most industries. It’s the stability and the strength and the skill of that management team is what is, really the differentiator for Genesis.

    I did an interview with Sabra Health Care REIT CEO Rick Matros and he spoke highly of you, but also expressed a lot of skepticism about the ability of a national operator to succeed on the skilled side. I think you mentioned some of the other big players that are getting out and even Genesis is starting to divest a little bit. I’m wondering if you think there is a Goldilocks question, a sweet spot for how big you can be and enjoy the efficiencies of scale and out-compete regionals? Or, do you think that the strategy on the way forward is going to be going big?

    Go back to history and think about one of the unique features of the Genesis strategy from Mike Walker, versus the old big companies like Beverly Enterprises. Beverly Enterprises was just a scale play with financial leverage and growth in scale. There was no focus in markets for a strategy of building ancillary businesses around dense market residents of skilled nursing centers. That was really the Genesis strategy that Mike followed.

    Prior to 2011, we acquired Sun. We were a highly concentrated company. We operated 30,000 beds. We’re probably the fourth or fifth largest company in the space. Every one of our beds was between southern Maine and northern Virginia. We could drive two hours to virtually every facility from one of three regional offices. I will say that health care no question is a local business.

    The issue is, can a large national player like Genesis deploy resources at the local level and be nimble enough to react to the specific challenges of those local markets? We have a track record that says absolutely, without question, yes. And I think we can do it better than the local operator because I can afford more resources. I can innovate more. I can be involved in the bundled payment program more. I can employ physicians. I can employ much higher levels of clinical skill than they can, which now gives me the ability to participate in the Medicare Shared Savings Program through the only post acute sponsored ACO in the country.

    I can do those things, they can’t, and over the long term, there will be tremendous value created through those initiatives and investments. I’m going to give you a golf analogy. Golf is a game of misses, and the way you become a good golfer is you reduce the dispersion pattern of your bad shots. The worse your bad shot is the worse you will be, so you want to narrow dispersion.

    As you get very large, it’s almost impossible not to have more dispersion away from, let’s say, your ideal goal. I’d say scale does lend itself to greater dispersion away from target, but I think that that dispersion can be significantly offset by our ability to invest in technology and innovation, to really be leaders in the industry, and that’s where we are today. I have a different view than Rick on that issue. I won’t debate that there are some highly successful local and regional operators, but I don’t think it’s an either/or.

    The ProMedica deal that recently happened with Welltower, we thought was really interesting. I’m just curious what your thoughts are about that deal and what it might portend.

    Well, first, I think that deal is good for the industry. ProMedica appears to be very well-capitalized and I think it will allow a capital source for ManorCare to, now, with all the challenges they had for the past number of years, to reinvest back in the skilled nursing industry. I think that’s good.

    I think transactions where you see alignment up and down the continuum are interesting. I think you could see more of them. It makes sense that providers do control and own most elements of the continuum. Both payers entering the providers phase and vertical integration along the provider continuum are interesting strategies to develop. Our scale makes it harder for that to happen, but I think you’ll see more of that type of evolution. I really do.

    Skilled nursing is currently facing a lot of challenges, but I think you’ve also said that you think we’re getting near a bottom. Are you referring to Genesis specifically or skilled nursing more broadly, and what improvements do you expect over the next year or whatever time-frame that you have in mind?

    We have been in a six-year down cycle; 2012 to 2018 has been a pretty steady down cycle, and there are a couple of things that impacted that. In the early part of that period there were significant reimbursement cuts, and then past that, in 2014 and 2015, you started to see the impact of health care reform. As I said, I’m a big supporter of changes in the fundamentals driven by health care reform and the focus on outcomes and cost.

    What that does is reduce utilization of the health care delivery system, and what you’ve seen is innovation to try to divert a patient away from a skilled nursing stay if they can be cared for in the community with at least an equal outcome at a lower cost. Even with the admissions that come into our centers, you see more aggressive management of the length of stay. That resulted in declining occupancy for the industry.

    We also are at a demographic low point for the population that accesses our industry. We are principally caring for people today that were born in the Depression era, which saw the country’s lowest birth rates.

    Even though demand today is around that low point, the supply [of skilled nursing beds] continues to shrink, and with financial distress, the declines have accelerated. What we will begin to see is an equilibrium.

    You get to the equilibrium point, and we believe very quickly you’ll begin to see shrinking supply overcome by demographically driven demand. This improvement in fundamentals will help the industry offset the chronic underfunding of the state Medicaid systems. You need to operate this business close to 90% occupancy.

    We’re now down in the 84% range, so that difference is very, very meaningful to the financial sustainability of the industry. We think over time, 2019 through 2025, you will see those occupancy numbers rise. Past 2020 and 2025, we will have an access problem to a skilled nursing bed in this country.

    Do you think that new skilled nursing payment model that’s coming down the pike is going to help answer any of those concerns with underfunding?

    The new reimbursement system is focused on the Medicare patient, Medicare Part A, which is today is about 11% of our census. That’s not going to solve the problem. I am cautiously optimistic that it will be positive for the industry.

    Today’s system is rehab-focused and oriented, as opposed to the broad needs of the patient, so at the highest level I’m supportive and optimistic around the new system. That doesn’t solve the Medicaid problem. The real problem in this country is long term care.

    As our life expectancy has increased from when Medicare laws were passed in the mid-60s, we find ourselves with significant increases in incidence of chronic disease. In many cases like dementia and Alzheimer’s, chronic disease does not need acute intervention. It needs other types of interventions that are not covered by the Medicare system today.

    If you, at 70, got cancer and I got Alzheimer’s, our system today would pay unlimited amounts of money, millions of dollars to cure your cancer. For my dementia and for my needs, the system tells me, “George, spend all the money you saved until you have spent into poverty, and then we’ll give you access to a center that will accept a below-cost Medicaid rate to provide your care for the rest of your life.”

    That’s not a good system, but it’s a system that was designed when the life expectancy was closer to 65, not 85. Alzheimer’s was barely a diagnosed condition and other elements of chronic disease were not managed where they are today. With extended life today, you have need for more congregate and supportive social services, nursing, non-acute interventions.

    It’s a system that has to change, but it has to be funded and people have to pay for it. They have to be willing to pay for a chronic care benefit under the Medicare program.

    We’ve covered a lot, so lastly, if there is one thing that’s keeping you up at night from a business perspective, what is that?

    What keeps me up at night are the challenges of the industry from a capital perspective. The industry is very challenged in accessing capital today. The reason for that is, the industry’s been operating in a down cycle, so it’s tough to attract investors unless you can convince them that we’re at the bottom, and things don’t look like they’re going to trend up.

    I do think that we are very, very, very close to the bottom and I’m looking forward to a return to an upcycle in this industry. What I’m most excited about, once we experience an upcycle, it means that the demographically-driven demand side of the equation has now reached equilibrium with the supply. And from this point, we have 30 years probably of growth between post-war and the end of the baby boomer generation that will come through this system with extraordinary numbers that will drive demand.

    Now, as a country, how we fill that need is a whole other debate. For our industry, I do think that we provide a very valuable component of the health care delivery system, with high levels of clinical skill, on a very cost-efficient platform. I think the skilled nursing industry will provide an increasingly valuable part of the continuum. I’m excited about getting past the bottom because once we are, the upside is very, very strong.