Skilled Nursing Providers Must Brace for Medicare Advantage Wave

Medicare Advantage isn’t going away, and skilled nursing facilities need to be prepared for the resulting operational challenges, according to a new report from Lancaster Pollard (LP).

LP, a Columbus, Ohio-based financial firm, pointed to recent troubles at Kindred Healthcare (NYSE: KND), which announced its exit from the skilled nursing industry in 2017; Genesis Healthcare, (NYSE: GEN), which has seen its stock price drop below $1 per share; and HCR ManorCare, which was taken over by its landlord, Quality Care Properties (NYSE: QCP), earlier this month.

Specifically, the companies struggled to cope with the changes in reimbursement trends as the Medicare Advantage (MA) population increases, the report argued.

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But the cascading effects of MA aren’t confined to any one skilled nursing player, LP senior managing director Steve Kennedy told Skilled Nursing News.

“This is an issue for any skilled nursing operator,” he said. “We first see it really highlighted by the big boys, because they’re having to report on it, and they’re having to answer questions about it.”

MA enrollment has leapt up in recent years, with 19 million enrollees, or a third of all Medicare recipients, in 2017. This represents a pain point for the notoriously thin-margined skilled nursing sector, as MA rates are 13% lower than traditional fee-for-service rates on average; additionally,  MA average length of stay is 19 days, compared with 23 days for traditional Medicare, the report noted.

“The bottom line for SNF operators is that operating structures need to be prepared for an increasing MA population which carry with it lower average reimbursement and shorter length of stays,” the report said.

Acquisition volume down

Yearly skilled nursing transaction volume was $6.5 billion in the third quarter of 2017, down by 6% from the year-ago period, according to LP’s analysis.

“For skilled nursing, the M&A activity in some measure is being driven by problematic properties,” Kennedy said.

That’s unlikely to change, he added. The pressures in the skilled nursing sector in terms of wages, labor costs, and expenses are ongoing and have no end in sight. As a result, operators on every level are feeling the pressure.

“If you’re a mom-and-pop with just one, two, or three [SNFs], you just do not have the economies of scale,” Kennedy explained. “But if you’re a really large owner/operator, it’s really hard to point to the really large owner/operators that are finding success in this environment.”

That said, opportunities do exist in the sector, particularly for skilled nursing providers with a dozen or so properties as larger operators divest, he said. If skilled nursing players can hold on long enough to meet the upcoming demographic wave of aging baby boomers, they can reap the benefits of the coming “extraordinary demand,” according to Kennedy.

“Opportunities exist for those owners that have scale and capital, but want to grow modestly,” he said.

Written by Maggie Flynn

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