Even Top Providers Face Financial Peril as Median Skilled Nursing Margin Falls to Zero

The financial pressures sweeping the skilled nursing space haven’t discriminated between the best- and worst-performing operators in the business, according to a new report from CliftonLarsonAllen — with the median operating margin dropping to zero across the industry in 2017.

That’s a 60-basis-point drop from the previous year, the accounting and consulting firm reported in the 33rd edition of its Skilled Nursing Facility Cost Comparison Report, released last week.

“It is particularly alarming that the median operating ratio is now at 0 percent,” CLA noted.

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Providers in the 75th percentile logged margins of 4.7%, while the 25th percentile’s margins fell to -6.0%, but that doesn’t necessarily mean it was smoother sailing for those at the top.

“The high-performing facilities experienced the largest decline in their 2017 operating margin of approximately 80 basis points,” CLA observed. “If this operating margin trend continues, SNFs will struggle to to generate sufficient cash flow for reinvesting back into the facility and investing in innovation and technology.”

The goose egg in the margin category was just one of several bleak data points in the report, which was based on 10,000 cost reports from the Centers for Medicare & Medicaid Services (CMS). CLA found median occupancy of 84.9% in 2017, down from 85.2% the year prior, and a continually souring payor mix: Medicare, which generally provides the highest per-day reimbursements for SNF services, accounted for 10.8% of all income, down from 11% in 2016.

Medicaid penetration also dipped from 65.2% to 64.2%, indicating that Medicare Advantage plans continue to make inroads.

“Medicare and many Medicare Advantage plans are implementing more value-based payment mechanisms, which highlight the need for facilities to monitor and improve quality metrics,” CLA noted.

In addition, CLA singled out debt as a key metric to observe. The top-quartile SNFs have debt-to-capitalization ratios above 100%, the firm found — and they’re not using that debt to expand or renovate.

“This leverage trend would suggest it is being driven more by negative financial performance year over year than facilities securing additional debt and reinvesting back into their facility,” CLA noted. “The median SNF experienced a 300-basis-point increase in this ratio in 2017.”

That negative trend extended to the debt service coverage ratio, which compares an individual facility’s income available for debt service against its annual debt service requirements. The median ratio fell from 1.9 to 1.8 between 2016 and 2017, CLA observed, but the top and bottom performers took a greater hit: Lower-quartile operators saw that ratio fall from 0.8 to 0.6, while the top-quartile SNFs had a decline of 5.9 to 5.5.

“The continued reductions in this margin highlight the need for providers to find additional revenue sources or manage operating costs to help service outstanding debt obligations given the capital-intense nature of the skilled nursing environment,” the consulting firm wrote. “We believe that the debt service coverage ratio will continue to be a critical ratio for organizations to measure, as low levels will make it difficult for an organization to access additional capital.”

Based on these factors, CLA joined a growing chorus of voices predicting that the financial pressures — along with the coming Patient-Driven Payment Model — will usher in a wave of consolidation in the sector.

“We also believe this trend of increased pressure on lower-performing SNFs will continue, which will likely result in consolidation as successful providers look to grow while others seek to exit the business,” CLA concluded.

Written by Alex Spanko

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