Skilled Nursing Operators Shouldn’t Count on Investors to Share PDPM Optimism

With just two weeks to go before the new payment model for nursing homes takes effect, operators that have prepared for the changes could be expecting a significant boost in their Medicare reimbursements.

But providers shouldn’t necessarily expect their investors to share in their optimism over the Patient-Driven Payment Model (PDPM).

Over the course of two days at the National Investment Center for Seniors Housing & Care’s (NIC) annual conference in Chicago last week, multiple voices told the assembled crowd of public and private investors that a wait-and-see approach might be the best strategy to avoid pain down the road.


At White Oak Healthcare Finance, a relatively new entrant into the skilled nursing investment space, the lending team isn’t folding any predicted rate increases into its underwriting process, according to managing director Daniel Reilly.

“We don’t underwrite any of that,” Reilly said during a Thursday panel discussion. “A lot can happen; there’s a lot of different factors that can go into that.”

Speaking earlier in the week, American Health Care Association president and Mark Parkinson was even blunter, explicitly calling on the capital providers in the audience to hold off on refinancing their SNF partners’ loans based on a month or two of solid results under the new system — going so far as to tell them to hang up on operators or owners who make that request.


The exact outcomes could vary widely on a region-to-region or even building-to-building basis, and any significant gains in reimbursements could result in costly adjustments downward once federal officials get a feel for the model in practice.

“If we have an increase in the aggregate, do not refinance based on that,” Parkinson said.

In theory, PDPM could boost reimbursements for nursing homes that have a solid mix of higher-acuity residents — or those that have begun to attract such patients in anticipation of the change.

The current Resource Utilization Group (RUG) system bases reimbursements on the volume of therapy services provided in each skilled nursing facility, a model that the federal government has described as potentially conducive to fraud; several providers have paid sizable settlements to resolve Department of Justice probes into improper therapy practices.

PDPM seeks to resolve that by linking Medicare payments to resident acuity, in theory more fairly compensating nursing homes for the actual care that they provide. In response, a flurry of potential revenue-boosting strategies have emerged in the lead-up to the October 1 implementation date, with depression treatment, speech therapy, and respiratory services touted as would-be revenue generators.

Of course, those services will still need to be medically necessary, and operators must clearly demonstrate resident conditions in their coding and paperwork when submitting Medicare claims under PDPM. What’s more, the Centers for Medicare & Medicaid Services (CMS) officials will be monitoring reimbursement patterns closely during the transition from RUG to PDPM, and will take action against providers they deem to have shifted services for purely financial gain.

That’s an area of concern for Eric Halpern, national head of health care for the New York City-based Bank Leumi USA. While he’s confident that the majority of the bank’s skilled nursing partners will see short-term benefits from PDPM — based on an intensive analysis of each operator’s outlook under the model — Halpern also told SNN that he has “no doubt” the government will take action to prevent overspending.

“The expectation is within a year or a year and a half, the whole PDPM will be recalibrated if the government finds that the actual money that’s being paid is higher than they expected,” Halpern said. “So the benefit will be there, but not necessarily long-lived.”

The current version of PDPM, in Halpern’s view, is just the first of many potential iterations that skilled nursing facilities will need to tackle in the future.

“The SNFs want to make sure that they’re taking the best care of their patients and that they’re maximizing in the new payment form,” he said. “They’ll do what they need in order to do both.”

Exploring specialized services isn’t the only way for operators to see benefits under PDPM: Multiple providers and investors have discussed the potential for expense savings through the use of group and concurrent therapy. Now that therapy services no longer directly generate revenue, the theory goes, operators can reduce top-line spending by increasing the amount of group and concurrent minutes, which CMS has capped at 25% of each resident’s total.

But how these complex shifts in expenses and reimbursements will play out in reality remains to be seen.

“It’s an interesting dichotomy there,” Reilly said. “You’re bringing in more complex patients, but you’re hopefully going to be saving on the staffing side.”

Reilly’s hesitance to bake expected PDPM rate increases into White Oak’s underwriting isn’t a commentary on its stance toward SNFs in general. The company, a subsidiary of the San Francisco-based alternative asset management firm White Oak Global Advisors, earlier this year launched a real estate investment trust (REIT) vehicle with the explicit goal of investing $500 million in senior housing and care properties.

At the time, managing director Jeff Erhardt told SNN that the REIT planned on an even 50-50 split between skilled nursing and other senior living asset types, including independent and assisted living and memory care.

Reilly expanded on his firm’s appetite for skilled nursing, describing the market as primed for more alternative investment; as traditional lenders continue to blanch at the reimbursement changes and other challenges that have buffeted the skilled nursing space over the last few years, private investors such as White Oak can provide similar underwriting with more tolerance for risk, he said.

“Some banks are still very hesitant to step into the sector, given the headwinds that we think have mostly subsided,” Reilly said. “We’re very bullish on the industry.”

Tim Mullaney contributed reporting to this story.

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