Five-Star Ratings Don’t Tell the Whole Story of Skilled Nursing Profitability

Hospitals and referral sources have increasingly turned to the Five-Star Quality Rating System when vetting potential skilled nursing partners, but buyers often go even deeper — as these ratings don’t always tell the full story behind a SNF’s upsides.

Rather than just focus on the rating provided by the Centers for Medicare & Medicaid Services (CMS), acquirers need to look at that rating as just one part of the story, and dig into the actual outcomes that residents are achieving at the facility.

“We all understand what the Five-Star [system] is and the weakness it has,” Eric Gillis, director of asset management at CareTrust REIT (Nasdaq: CTRE), said during the National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in Dallas last month. “The Five-Star rating, it’s not a true representation for how good a facility is — and in fact we see a lot of one- and two-star buildings that are very profitable.”

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Often a new facility might be doing a fantastic job with patients and be generating great outcomes, but it hasn’t had time to obtain that higher rating. It could also be that the facility is operating in a tough regulatory environment, which can also have an impact on the rating.

“From a valuation perspective, we look at how they are doing clinically. We have to take that in context based on what type of regulator environment they are operating in,” Gillis added.

Savvy investors have started to look closer at facilities even if they have a low rating, as they could represent a smart acquisition opportunity. However, a higher rating remains important over the long term when it comes to referral partners and participating in any new type of payment model.

“We are seeing more and more that the hospitals are narrowing their networks. A three-star is a qualifier to be a part of that hospital network,” Gillis said. “If they fall out of that [network], it’s a cause for concern.”

Those networks can be the most significant referral partners for any given skilled nursing facility, and it’s important to deliver quality outcomes with data to back it up.

“When we start to think about the future of a skilled nursing property, we have to look beyond the traditional ways that we would evaluate that,” Steven Littlehale, executive vice president and chief clinical officer at PointRight, said during the conference. “[You must] start looking at these very clinical outcomes which make or break the success of a facility.”

At the end of the day, a higher Five-Star rating means nothing unless the facility is able to maintain it in the future.

“Five-Star is a leading indicator for present profitability, but not a long-term indicator for profitability and success,” Littlehale said. “The success of a skilled nursing facility requires that metrics be identified, monitored, and managed.”

Written by John Yedinak

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