Wave of Anticipated Skilled Nursing M&A Action Still Offshore for Now

Major real estate investment trusts (REITs) with stakes in the skilled nursing world almost universally expressed optimism about the coming change in Medicare Part A reimbursement — and several predicted changes in mergers and acquisitions as a result.

But the expected wave of small mom-and-pops exiting the skilled nursing industry because the Patient-Driven Payment Model (PDPM) was one change too many hasn’t materialized as of yet. And the possibility exists that it might not happen at all.

“There are all kinds of variables that go into the decision to sell,” Isaac Dole, the founder and CEO of Birchwood Healthcare Partners, told Skilled Nursing News via email. “For instance, maintaining gainful employment for the second and third generations is often a big factor. PDPM is obviously a major variable in this complex decision-making process, but it is only one variable.”

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As a result, Dole thinks it’s unlikely there’ll be a wave of PDPM sales like those predicted by Omega Healthcare Investors (NYSE: OHI) and CareTrust (Nasdaq: CTRE) soon after PDPM was finalized.

“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,” CareTrust chief investment officer Mark Lamb said on an earnings call last August. “And so they’re choosing to sell at this point.”

In an interview with SNN at the National Investment Center for Seniors Housing & Care’s (NIC) annual spring conference in San Diego in February, Lamb elaborated further on what might drive smaller operators out of the business. It’s a combination of marketplace pressures leading mom-and-pops to consider selling, not just the new payment model.

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“It’s not like we have people that are just saying: ‘Hey, look, I want to exit because PDPM’s coming,'” Lamb explained to SNN. “A lot of the mom-and-pops, whether it’s labor pressure — I think it’s a confluence of things.”

Changes in diligence

PDPM is causing shifts in how prospective buyers and sellers are assessing given SNF properties. But how much of an impact it’s having is harder to quantify.

Buyers have to base decisions on a facility’s current performance under the Resource Utilization Group, Version IV (RUG-IV) system, and the factors they’ll be assessing are specific to each facility, Kevin Laidlaw, senior vice president of M&A at Lancaster Pollard, explained. Investors then have to layer the current performance over the PDPM projections, and then contemplate their own sophistication and ability to maximize reimbursement.

“They’re looking at the RUGs and what that facility has generated and how that’s going to translate to PDPM, so no doubt that’s more of a focus,” Laidlaw told SNN. “But I don’t believe that it’s changed behavior quite yet, given that it’s not being implemented until October. I haven’t seen a lot on that front. But no doubt it’s something that’s on buyers’ minds.”

That was echoed by Brad Granger, vice president of operational and clinical underwriting at the Columbus, Ohio-based Lancaster Pollard.

“I think people are cautiously optimistic about PDPM,” he said. “I think they feel: We’re going to get reimbursed now for doing a lot of the clinical services we’ve always been doing, with staff that we already have in the building that we don’t have to pay a per-minute charge to like we do a therapist … but everybody is waiting, they’re getting ready.”

One variable of many

When it comes to buying and selling SNFs, however, there are so many variables that have a material effect on performance that PDPM becomes one factor among many, Dole said.

“For instance, we are paying much more attention to labor, referral sources, competition, vendor contracts, insurance coverage, employee benefits, capex, etc.,” he told SNN. “In our typical acquisition, those variables can be more impactful than PDPM.”

One of the first things Lancaster Pollard examines in a transaction, for instance, is the managed care enrollment within the ZIP code of a facility, including the type of providers in the network and the hospitals they’re associated with — as well as whether the hospital would refer to the facility in question, Granger noted. Other issues might include a facility’s compliance, ratings in the Centers for Medicare & Medicaid Services’ (CMS) five-star system, and overall operational health.

The other major factor to consider is that the choice to sell takes a significant amount of time to come to fruition and completion, Dole said. So while he could envision it being “the last straw” for legacy, multi-generational SNF owners, he does not believe all of those owners are going to decide to sell nearly simultaneously over the course of the next year.

“If you think through all of the many, many variables that impact the SNF business at the local, state, and federal level each year or over a multi-year period, I just don’t see how that one variable could result in a massive sell off,” Dole said.

Other changes that could contribute to change fatigue for operators include the implementation of payroll-based journal data for staffing, the Requirements of Participation regulations, the changes in staffing requirements, and other sweeping shifts in the long-term care industry over the past year or so, Granger observed.

And PDPM doesn’t automatically spell disaster, Laca Wong-Hammond, a managing director at Lancaster Pollard, told SNN. But what the new model will do is intensify the burdens and pressures that already exist in the SNF M&A space, she said.

“Their implementation will continue to intensify the widening gap between the profile of sellers and buyers,” Wong-Hammond explained. “We’re seeing the more sophisticated and usually larger-scale operators will have more proactive action [plans] developed, and a strategy that’s already implemented in advance of this new paradigm.”

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