The new skilled nursing payment model has received mostly praise from the industry since its finalization in late July, but it could have the side effect of leading more mom-and-pop SNFs to exit the space altogether.
It’s important to note, however, that it’s not the only reason they’re leaving.
“While PDPM is a big factor in the decision-making process to sell, you can’t forget that there’s a wide variety of pressures facing the skilled nursing industry,” Sammy Forrest, assistant vice president on the mergers and acquisitions team at Columbus, Ohio-based Lancaster Pollard, told Skilled Nursing News.
Major players expect good things- and deals
The finalization of the new Patient-Driven Payment Model (PDPM) by the Centers for Medicare & Medicaid Services has been hailed — mostly — by the industry as good news for a field facing pressure on multiple fronts.
“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,” Omega Healthcare Investors (NYSE: OHI) CEO Taylor Pickett said on the real estate investment trust’s (REIT) second-quarter earnings call.
All three REITs also believe that the new payment model will lead to a wave of skilled nursing sales by smaller, mom-and-pop style operators.
“Each iteration of more sophistication in this business has driven the consolidation. It’s been the model that we’ve run forever,” Pickett said in the earnings call. “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.’”
CareTrust chief investment officer Mark Lamb also predicted that many mom-and-pops wouldn’t want to go through another transition, as did Sabra CEO Rick Matros.
“I think with all the changes in the reimbursement model, we’re going to start to see the smaller traditional long-term care providers determine it’s in their best interest to get out of the business,” Matros said.
Forrest stressed to SNN, however, that while PDPM could serve as a moment of reckoning for some smaller operators, the typical mom-and-pop SNF is facing a host of other pressures
“Increased prevalence of managed care, lower reimbursement, shorter lengths of stay that comes as a result of that, an increased reliance on technology, the importance of scale in negotiating contracts, higher staffing costs — all these things are pressures smaller operators are facing,” he said. “And then PDPM is forcing people to evaluate whether they want to continue on with the business longer-term.”
Challenges for smaller operators
In addition, PDPM poses challenges for smaller operators that might be less of an issue to skilled nursing entities with more scale and resources. For instance, the model is expected to give a boost to those operators able to deal with medically complex patients and offer targeted care specialties, such as speech therapy or cardiac care.
“The disadvantage for the smaller guys is the transition is much more difficult if you don’t have a history of caring for that kind of resident population,” Forrest explained.
Even if smaller operators have a specialty or have cared for complex patients, they might be lacking in other crucial resources, such as technology or funds. With insurers and referral sources increasingly relying on data to make decisions on post-acute care, that could be a major problem.
And PDPM will necessitate major overhauls in the day-to-day aspects of the business — which will, in turn, require resources and time, which smaller operators tend to lack.
“Everyone across your entire organization is going need new training,” Forrest said. “And that takes a lot of time, a lot of energy and a lot of money.”
Opportunity for aggressive buyers
Buyers will be looking at a variety of factors, including the location of a facility, the state’s reimbursement environment, and how litigious the state is. But they are also expected to move decisively.
“What we’ve seen from the acquisition market is that the turnaround or value-add deals are where people are being the most aggressive,” Forrest said.
Lancaster Pollard has “definitely” seen an increase the number of small regional SNF owners and mom-and-pop SNFs looking to sell, and the majority of its skilled pipeline is made up of these types of deals, Forrest told SNN.
“Given the pressures of the industry rolling out a completely new reimbursement model, a strong acquisition market, and attractive interest rates, we would expect that trend to continue, with small portfolio sales and kind of smaller mom-and pop sales,” he said.
Written by Maggie Flynn