One-Star Skilled Nursing Facilities Could Hold Promise for Investors

A five-star rating from the Centers for Medicare & Medicaid Services (CMS) can boost a skilled nursing facility’s profile in a community and perhaps attract increased attention — and dollars — from potential investors. But savvy buyers should consider the wider context of a particular SNF’s Nursing Home Compare stars, as buried beneath a supposedly “bad” rating could be a quality facility worthy of investment.

The star system has become an increasingly important metric for buyers and other investors, particularly in competitive markets, as per-bed prices for SNFs reach record highs, according to Brad Competty, vice president at senior care financing firm Lancaster Pollard.

“In a competitive market, they’re looking at that being another item that they can put on their pros-versus-cons list of one facility versus another,” Competty told Skilled Nursing News. “That five-star is likely going to be getting more referrals, which means that there’s a chance that occupancy and census mix is probably going to be better at that facility.”

But Competty — along with his Lancaster Pollard colleague Brad Granger — argued in a recent report that buyers shouldn’t be afraid to open the hood of a one- or two-star facility to find hidden value, especially given the overall subjectivity of the rating system.

“Buyers intimately familiar with the five-star rating system will thoroughly examine a lower-rated facility to determine its cause,” Competty and Granger wrote. “Specifically, these buyers understand that not all one-star facilities are created equal.”

Competty specifically pointed out that there are vast regional differences in the benchmarks that make up the star rating, and facilities are ranked against their immediate peers in their particular state — not the overall nationwide SNF landscape. For instance, a facility on the East Coast that has only a handful of deficiencies may receive a low rating because its local competitors have an even cleaner record, but if it was somehow picked up and dropped in a Midwestern state where higher levels of deficiencies are normal, that same facility could receive a higher rating.

“The facility that might be a one-star in one state might be a three-, four-, five-star in another state,” Competty said. “It’s very dependent on location and what your peers are doing.”

Some facilities also might receive low ratings for problems that can be rectified with relatively little capital investment. For instance, insufficient staffing levels can steal stars from a SNF, but Competty said a smart investor knows that he or she can fix that problem.

“The easiest thing for them to do is walk in and say: ‘Your staffing ratios are low compared to what the averages are,’” Competty said. “They staff a couple of people, and then they’re able to get that star rating up.”

Competty cautioned that some low-rating factors can require heavier lifting to fix, such as poor health inspections or survey responses; because CMS looks at a weighted average of these metrics for three years, as it can take time for a SNF to turn those figures around. But even then, Competty said, a certain type of buyer can see a reason to take the plunge.

“Somebody might look at that and say there’s some upside there,” he said.

Competty emphasized that CMS’s system still serves a purpose: The ratings remain an important metric for potential residents and their families, which he said was the program’s original purpose. But for the skilled nursing investor, they should be considered just one part of a larger ecosystem.

“It provides a nice foundation, but it’s not a perfect rating system,” Competty said.

Written by Alex Spanko