How to Open a Nursing Home: what you need to know

Caregiver hold patient's hand, and a question mark to the right.

Opening a nursing home can be an intimidating task. I’ve been a licensed nursing home administrator for over 40 years and the thought of opening a facility can still keep me up at night! In my career, I’ve had the opportunity to open several skilled nursing facilities and each one has presented its own set of challenges. In this post, I’d like to share with you some of the lessons I’ve learned over the years.

In this Article …

 

Where do I start if I want to open a nursing home?

Assuming that you are unfamiliar with the nursing home business, the best place to begin is to gain some knowledge of the nursing home industry and how nursing homes are run.

 

Gain a greater understanding of the nursing home business

Nursing homes or skilled nursing facilities (both are used commonly), operations are complex and highly regulated business entities. Based on both federal regulations and state regulations, a nursing home is required to be run by an individual with a nursing home administrator license. A skilled nursing facility is NOT an assisted living facility. Nursing home residents require full-time care by medical professionals, including certified nursing assistants and registered nurses. For the most part, a nursing home and an assisted living facility are governed by different sets of regulations and regulatory agencies.

How are nursing homes regulated?

The nursing home industry is governed by a lengthy set of both state and federal regulations. It is imperative that you have a deep understanding of these state and federal regulations as they govern the operations of all nursing homes. The state, not the local health department usually enforces these regulations.

How are nursing homes paid?

Nursing home reimbursement is complex and requires highly specialized knowledge. For most nursing homes, the majority of their revenues are derived from governmental sources-Medicare and Medicaid.

 

Donut chart titled: Distribution of Nursing Home Residents by Payer Source - 2022
Payer source figures courtesy Kaiser Family Foundation.

Do a personal assessment of your needs

A nursing home project, whether it is building one, acquiring one, or adding on to one is challenging, even for the most experienced operators. Unless you have a good amount of experience operating a nursing home, seek assistance from experienced professionals who can guide you through the process.

Do you have a team of experts to assist you?

I’ve already mentioned the essential nature of obtaining assistance to guide you through the process. But, you also need to consider bringing on board other team members-architects, general contractors, lenders and/or financing consultants, and potentially a nursing home operator, if you do not intend on running the nursing home yourself. And, it is vital that all of these team members have the proper background and professional experience involving skilled nursing facilities.

Do you need funding?

Unless you have a whole lot of cash lying around, chances are you’ll need financing for your nursing home project. Be realistic when it comes to projecting the funds you’ll need to carry out your endeavor. Lean heavily on your experienced team to help you come up with these estimates. For the most part, small business loans probably won’t provide the funding you will need, so get prepared to deal with larger lenders. Be mindful that lenders will want you to have “skin in the game” so be prepared to come in with your own personal assets, whether it is cash or other assets such as property to contribute to the venture.

Assess your risk tolerance

Opening a nursing home is a difficult undertaking. It requires many steps and a whole lot of work. Even if you do surround yourself with an experienced team of professionals, there are plenty of risks ahead. Be frank with yourself-even if your risk tolerance is high, a nursing home project will be challenging.

 

Ok, I’ve done my preparation, what’s next?

The preparation of a solid business plan is a good place to start. And the logical first step in that process is performing a market study. For the most part, lenders strongly prefer that you not conduct market research on your own project. Their preference is for you to engage a third-party expert to assess the market and render a recommendation on the viability of the project.

A market study is ultimately designed to answer the question, “I want to open a nursing home, does it make sense and can it be successful?” There are several key components to a market study. I’ll overview some of the key sections in the table below …

Primary market The primary and secondary markets identify the geographic area from which you will draw the majority of your patients.
Competitive analysis A thorough review/analysis of all your competitors in the market.
Market demographics Demographic analysis of your likely patients in your market area.
Penetration rates Calculation of both market and project penetration rates.
Demand analysis Formulation and calculation of a demand analysis demonstrating bed surplus or shortage.

 

Perform a financial feasibility analysis

Once your market study is complete and assuming that the results confirm the viability of the project, the next step is to formulate financial projections. These financial projections should cover all your startup costs, revenues, and operating costs. If you already have an operating partner, they can do these financial projections. If not, consider engaging the expert which conducted the market research to do this step also. Also, be aware that most bank loans (or any type of loan for that matter) will likely require this component.

Add some additional components to your business plan

There is plenty of information out there on writing a business plan. But, an oft-neglected component of a business plan is the marketing plan. Don’t forget to include a solid plan on how you will fill up your nursing home after opening and how you will maintain stabilized occupancy once it is filled up. Doing so will give your reader confidence that you have a well-conceived marketing strategy.

Also, it is important to highlight the background and professional experience of the team that you have surrounded yourself with. Highlight their knowledge of the nursing home business so that the business plan reader knows you have the expertise required to make your nursing home venture a success.

Keep in mind that a well-written business plan can form the foundation of solid nursing home operations. For example, if you’ve done your financial projections properly, you already have your operating budget. Also, if you’ve done your marketing plan properly, you have a guide for your marketing personnel to follow.

 

You should give consideration to the legal entity that your nursing home business will require. And, remember that if your nursing home decides to participate in the Medicare and Medicaid programs (and most nursing homes do), then you’ll need to obtain a provider number. Organizations often consider adding a limited liability company to their business structure to provide “administrative services” to the operating company, services such as payroll administration, accounting, billing, and other support services. You should consult with your legal counsel and business consultant when planning the legal entity that encompasses your nursing home operations.

Nursing homes require a myriad of additional business considerations. These include:

  • Policies and procedures
  • Insurances
  • Job descriptions
  • Business license
  • Provider agreements
  • Banking relationships

There are many other business considerations for your nursing home which your team can advise you on.

 

How much does it cost to open a nursing home?

The costs are significant and as you might imagine highly variable. The most significant cost (and this applies to when you are building a new facility) relates to the construction of a nursing home. Costs are dependent on factors such as geographic location, type of funding (governmental funding may require prevailing wage which has the potential of significantly increasing your construction costs), and design components. Other substantial cost components include:

  • Design fees
  • Entitlement costs
  • Legal fees
  • Furniture, fixtures, and equipment (“FF&E”)
  • Startup costs (Pre-opening)

It’s essential that you, with the assistance of your team, perform a full value engineering of the entire project before embarking full speed on your endeavor. Of course, your funding source will want this also.

 

Proper nursing home design is a MUST!

Any discussion about starting a nursing home must include thoughts about how to design a nursing home facility. Unless you’re experienced with nursing home design, it would be highly advantageous to work with an architect who has a deep background in designing nursing home facilities.

If you have a high-quality market study, use the input from that study to assist you and your design team in formulating the layout of your nursing home. For example, utilize the data and observations from the competitive analysis section of the report to understand the level of the competition. By understanding this level, you can more effectively design your facility to better compete with the market. Also, be mindful of the service specialties you desire to be included in your nursing home-this will also guide your design characteristics.

Keep in mind that excellent design contributes to the efficiency of the operations (which can reduce your operating costs and thus, your bottom line) and to the quality of nursing care you provide to your patients.

 

The entitlement process is different for nursing homes!

Unlike most other projects, nursing homes usually require an additional step in the entitlement process than other types of businesses. While local approval is required, states often require an additional level of review and approval. (By the way, this additional step is usually not required for an assisted living facility.) For example, the state of California requires that you go through plan checking with the Office of Statewide Health Planning and Development (OSHPD) for approval of your plans. This additional step can be more rigorous and challenging than the local approval process. Consequently, make sure that your design team is familiar with this process and has experience with it.

It should be noted that the above process relates to a new facility project (or if you’re adding on to an existing nursing home). If you’re acquiring an existing nursing home, then the entitlement process is not applicable. However, you will want to check if a change of ownership process with the state licensing agency is applicable.

 

What must be done prior to opening?

Ok, so your nursing home project is going well and you’re beginning to think it’s time to prepare to open a nursing home. Here are some considerations.

Consider bringing aboard your key leadership team early

Four to six months prior to your anticipated opening, it’s time to start interviewing nursing home administrators. In addition, you’ll want to do the same with a director of nursing who is usually a registered nurse and ideally, one with experience in the role. Also, consider bringing aboard a marketing person. You’ll want to have well-established relationships with the community as well as your key referral sources before you open your doors.

Time to add the remaining leadership team

I would recommend that you allow your nursing home administrator to hire the remaining department heads. (And you might want to consider allowing your administrator to hire the director of nursing also!) Thus, the remaining department heads will likely come aboard two to three months prior to opening.

Hiring the remaining staff members

Approximately 30 days prior to your anticipated opening, it’s time to hire staff. By that, I mean to hire employees, including care providers, physical therapists, and other medical professionals, in all departments so, in essence, you’re fully staffed. And yes, having your full leadership team and all other employees on payroll is expensive without any corresponding revenues to offset such an expense. However, you will need time to interview, orient, and train employees. Also, don’t forget there are a variety of requirements such as background checks that must be attended to prior to opening.

Medicare/Medicaid surveys

If you’re intending on obtaining Medicare and Medicaid certification (and yes, you should seriously consider doing that), then you’ll be undergoing certification surveys. These surveys require that you have a fully operational facility at the time of the survey. This means that your facility operations must comply with all federal and state regulations.

The pre-opening period is expensive!

As you can see from some of the pre-opening activities that we’ve covered, a lot of funds will be expended before you even open your nursing home. As a result, your startup costs will be substantial. It’s vital that you properly plan for this expense and for you to thoroughly plan these activities. The presence of an experienced consultant or an experienced operating partner can go a long way toward making your opening a successful one.

 

Starting a nursing home-some final thoughts

As you can see, opening a nursing home is a challenging undertaking. There are many demands involved in operating a successful nursing home business, from staffing and reimbursement issues to regulations. There are also great rewards for having your own nursing home. You are providing much-needed care to our aging population.

But that said, the process of opening a nursing home is a complex one, even for those experienced nursing home operators out there. If you don’t have the experience or knowledge necessary to navigate these challenges, it’s best to seek help from someone who does. An experienced professional can help you understand all the steps involved in opening a nursing home and give you the best chance of success. Are you thinking of opening a nursing home? Have you sought advice from an expert? If not, perhaps you should.

When you need proven expertise and performance

Craig Fukushima, NHA, MBA

Mr. Craig T. Fukushima’s health care experience spans more than 35 years with special expertise in the long term care sector, including implementation of innovative health care projects in domestic and international locations.