Leaders at two major real estate investment trusts (REITs) focused on health care assets have predicted a coming wave of mergers-and-acquisitions volume as smaller providers refuse to adapt to new skilled nursing payment rules.
As mom-and-pop operators begin to unpack the changes associated with the Patient-Driven Payment Model (PDPM) — the new set of therapy reimbursement rules that will shift incentives away from volume and toward more complex care — a major slice of the smaller players will decide to exit the industry instead of changing their business models, according to Omega Healthcare Investors (NYSE: OHI) CEO Taylor Pickett.
“Each iteration of more sophistication in this business has driven the consolidation. It’s been the model that we’ve run forever,” Pickett said on his company’s second-quarter earnings call with investors and analysts Monday morning. “It’s just another iteration of what has caused the consolidation of this industry over the last decade. If history holds true, we’ll see some of these local operators just say: ‘Okay, I’ve had enough. I’m not going to go through this next change.'”
Pickett was echoing comments made last week by CareTrust REIT (Nasdaq: CTRE) chief investment officer Mark Lamb, who similarly predicted a surge of M&A activity once the full effects of PDPM become clear to non-regional or national operators.
“I think the shift from RUG-IV to PDPM is a little bit of a game changer for mom-and-pops, and not knowing how to navigate that … a lot of them don’t want to go through another transition,” Lamb said during CareTrust’s quarterly call on August 2. “And so they’re choosing to sell at this point.”
The predictions come as Omega plows through a major year of shedding assets, with 47 facilities sold during the second quarter of the year. In addition to $3.8 million in buildings currently held for sale, the Hunt Valley, Md.-based REIT plans to offload $90 million more; so far in 2018, Omega has offloaded 64 properties for $311 million. Some of those proceeds will eventually be funneled into acquiring other assets, Pickett said.
As he did on the first-quarter earnings call, Pickett framed the REIT’s ability to find buyers during the selling spree as a reflection of “continued appetite for SNF assets by local-market private buyers.”
Despite completing a restructuring deal with troubled tenant Signature HealthCARE, Omega also remains locked in a legal battle with tenant Orianna Health Systems over a restructuring agreement that the REIT terminated last month. Omega officials on the call declined to discuss the matter, citing the ongoing legal actions.
Pickett again affirmed his optimistic outlook for the skilled nursing industry under the new payment structure, which the Centers for Medicare & Medicaid Services finalized last week. Unlike American Health Care Association leader Mark Parkinson, who railed against a 25% cap on group and concurrent therapy services in an interview with SNN, Pickett saw the new structure as an opportunity for providers.
“[PDPM] creates opportunities for service efficiencies via group and concurrent therapy protocols without sacrificing outcomes,” Pickett said. “We are optimistic that PDPM will positively impact both facility performance and patient care with its focus on the needs of patients rather than the volume of services provided.”
Pickett also offered a more positive outlook for the Medicaid program, noting that last summer’s push to shift the program to a block-grant or per-capita cap system — which would have resulted in hundreds of billions of dollars in Medicaid cuts — has fizzled in Congress.
Written by Alex Spanko