Today’s bottom line is more sensitive than ever, forcing operators to get creative with their capacity (see NIC Skilled Nursing Data: Downward Pressure on Occupancy Continues and Skilled Nursing Operators Face Down ‘Unsustainable’ $2 Billion Cut). Depending on state laws, operators are able to either acquire or reduce their bed licenses. Let’s talk about how and why operators would choose to adjust their capacity in nursing care facilities.Certificate of Need CON Bed Licenses Licensed BedsTo be clear, when we refer to Bed Licenses (“Beds”), we are talking about the right to operate the beds, or the licenses. We are not referring to any transactions that include real estate as part of the transaction.Acquiring Bed Licenses. There are several reasons why operators may choose to acquire additional beds. In most cases, operators are choosing to expand through either new construction or constructing an addition to an existing facility. How can operators acquire additional bed licenses?

1)  Acquiring Additional Bed Licenses Through The State. No two states are alike. However, it’s easy to confuse Certificate of Need states with states that have a moratorium on issuing additional beds. Some states happen to have both CON laws and a moratorium in place, while other states may have one, the other, or neither (see Five Reasons Why Operators Acquire Bed Licenses).

Not only does the availability of beds vary by state, but the quantity does as well. For example, some states will issue the requested number of beds to a particular county if the CON applicant can prove there is a “need” for that given area. Other states will allow operators to apply for an additional 10% increase in their bed capacity as long as their occupancy and/or 5-star ratings meet certain thresholds. Operators sometimes find themselves in a situation where there are multiple applications for the same area. This can complicate the approval process.

2)  Acquiring Additional Bed Licenses From Other Operators. Depending on individual state rules, operators may be able to acquire beds from other operators. Most operators prefer to operate in these high barrier to entry states where bed license acquisitions from other operators is necessary for growth. The biggest frustration buying operators face in these states, is finding bed licenses available for sale. However, operators appreciate the predictability of locking up the quantity of beds they’ll need under a purchase agreement, as opposed to a state where beds are issued. Bed license availability is never guaranteed in those states.

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Reducing Bed Licenses. On the contrary, there are a few common reasons why an operator may choose to reduce the number of bed licenses at any given facility. The operator may wish to convert rooms from semi-private to private, there may be a better use for the real estate, an operator may be reimbursed higher if occupancy rates are above a certain threshold, or an operator may want to avoid future tax payments on each individual license. How can operators reduce their bed licenses?

3)  Giving Bed Licenses Back To The State. This is a common occurrence in states or geographical areas where bed licenses hold little to no value. There is often a de-licensure form that the operator must complete and send to the state. But why would anyone choose to give away an extremely valuable asset when they could be sold? Some operators are pressed for time. They would rather avoid the time it takes to find a buyer, get the beds under purchase agreement, and file the bed transfer application, than filing the de-licensure application with the state. Some states have a bed tax, so operators will choose to avoid this at all costs.

4)  Selling Bed Licenses To Other Operators. While some states will not allow beds to be transferred from one operator to another, other states will review and approve bed transfers from one operator to another. Once the seller has agreed to sell the bed licenses to another operator, the buyer and seller will typically execute a purchase agreement, followed by a joint effort to complete an application to transfer the beds.

Why would an operator choose to sell their bed licenses? Most notably, operators prefer to sell their bed licenses to monetize on an asset that has been underutilized, fetching attractive valuations in today’s market. Operators also want control over who the beds are sold to and where the beds can be moved. This control is usually lost if the beds are given back to the state.

This article is not to be considered advice. Before making investment or disposition decisions, consult a professional for legal advice.Bed License Exchange is a trusted platform that introduces buyers and sellers to an entire marketplace of bed licenses in the healthcare industry. Bed licenses ranging from acute care, post-acute care and senior living are available for operators and investors, to act either as a buyer or a seller on the auction-style platform. Bed License Exchange is a subsidiary of HealthSwap Advisors, LLC.