Skilled Nursing Sell-Off in Texas Goes Beyond Payment: ‘The Problem is Not the Medicaid Rate’

Texas’s failure to pass a program to increase Medicaid payment to skilled nursing facilities was the latest step not taken in improving the reimbursement in the Lone Star State.

The legislation, which would have set up a long-term care quality provider participation program (QPPP) to funnel additional compensation to SNFs for meeting certain quality metrics, stalled out when the state’s most recent legislative session ended this spring without a vote on the measure.

In the wake of the failure, several skilled nursing facilities hit the market in Texas, and CareTrust REIT (Nasdaq: CTRE) chief investment officer Mark Lamb predicted that the lack of rate relief would prompt more operators to pick up stakes and sell.

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“Pricing for SNF continue to be aggressive in states such as California, Maryland, and Virginia, while Texas continues to see fallout of the failed bed tax proposal from this past legislative session with several buildings on the market and more on the way,” he said on the company’s most recent earnings call.

But linking the flood of inventory to the failed bed tax might be something of an oversimplification, several experts told Skilled Nursing News.

“It was already happening,” Jeff Rhodes, managing director at the Chicago-based real estate brokerage Helios Healthcare Advisors, said. “The problems have existed in Texas prior to this moment.”

Issues including – but not limited to – Medicaid

Scott Blount and Sammy Forrest, both vice presidents at financial services firm Lancaster Pollard, agreed with that assessment. Though the bed tax failure was on providers’ minds because of how recent its failure was, reimbursement woes have been a long-running issue in the state.

Another factor in the Texas inventory landscape is the bankruptcy of Senior Care Centers, according to Blount, who is responsible for central and south Texas, Louisiana, and Mississippi for Lancaster Pollard.

Senior Care Centers operated and managed more than 100 skilled nursing and assisted/independent living communities in Texas and Louisiana when it entered Chapter 11 bankruptcy in December of last year. The bankruptcy of another major provider, Preferred Care, has also led to a slew of SNFs on the market, he added.

Rural facilities that have a heavy Medicaid census have particularly struggled, but even ones in major markets have been affected by the problems that have accumulated in Texas over several years, Blount said.

“There’s been a lot of new development over the last five to seven years,” he told SNN. “Texas does not have a moratorium on new beds. There’s different ways to get beds in counties, but in general, there’s been a lot of development. So even in nicer, more populated areas, those homes are having to fight for the same [residents] — there’s only so many Medicare discharges.”

Overdevelopment of Medicare beds is one of the major challenges of the Texas SNF landscape, Rhodes said, particularly for facilities that have dual certification, or licenses for Medicare and certification for Medicaid. Many providers in Texas have lost “a lot of revenue” because of skilled mix issues, Rhodes told SNN.

These facilities are being built in desirable areas such as Frisco, Texas, or Montgomery County, and even though only generally maintain occupancy of about 50% to 60%, all the residents are higher-acuity, skilled patients. As those people migrate toward the newer buildings with nicer amenities, owners of older, dually certified buildings no longer have the skilled mix to support themselves, and have lost revenue, he explained.

In fact, Rhodes said he knows providers whose average Medicaid reimbursement rate is $170 or $180 per patient day, a generally solid figure for Texas; what has hurt them is the loss of the skilled mix, and the fact that managed care organizations (MCOs) are sending patients home for rehabilitation, rather than to institutional settings. The rate could be improved, he stressed. But it’s not the cause of a major sell-off.

“The problem is not the Medicaid rate,” he told SNN.

The mergers and acquisitions landscape is quite active in Texas, but it’s not a sell-off in the way the term is normally understood, Blueprint Healthcare Real Estate Advisors managing director Gideon Orion told SNN via e-mail. And he agreed with Rhodes, Blount and Forrest that the reimbursement disparity in Texas is not a new problem.

“I do not believe there will be a mass exit in the future due to the failed legislation, but I do believe the M&A landscape will remain active as larger owners/operators continue to scale back and divest assets in non-strategic markets, especially underperforming facilities,” he told SNN. “Furthermore, I believe a lot of the M&A activity will continue as a result of our REIT and [private equity] clients mitigating and diversifying their tenant base, as we continue to see some notable operators resolving their well-publicized distressed situations.”

Why buy?

But despite the overdevelopment, managed care headaches, and failure to increase Medicaid reimbursement, there’s still considerable interest in acquiring SNFs in Texas. In fact, buyers who are opportunistic like the state despite the challenges, Forrest said.

“It definitely impacts pricing, but I would say that there’s still interest in Texas, and that a deal that we take to market can be salable,” he told SNN.

Profitability is still possible with a good patient mix, Blount noted, and geography becomes a key consideration as regional players grow and try to build scale in key parts of the state.

“The reason buyers are still very interested in the state is because there is money to be made with opportunities to build upon existing portfolios or enter the state with scale,” Orion told SNN.

Those opportunities come in part because of the leasing challenges that have plagued other SNF landlord-tenant partnerships, with operators getting hit by the escalating leases signed in more prosperous times, Rhodes said — when managed care was less of a force, when revenues were expected to increase, and before there was an “onslaught” of buildings targeting Medicare residents.

“A lot of that is because these are smaller regional providers, and they’re just way more efficient at what they do than somebody like a Senior Care [Centers], who had 100-plus buildings,” he said.

The providers with which Orion works tend to have specific acquisition benchmarks related to performance and geography, he told SNN. Some will look at certain geographies in the state, with some gravitating to rural markets and others focusing only on major metropolitan statistical areas, he explained.

“Buyers are underwriting on a risk-adjusted basis relative to the Medicaid rates, but considerations such as participation in the [Quality Incentive Payment Program], PDPM, and the forthcoming Medicare rate increases, and the ability to take assets to HUD — so long as rates remain low, all play a key role in the continued interest,” he said.

In fact, there are some operators who see opportunity in the state because of Medicaid, Rhodes said. Though he stressed that he’s “not an expert at billing,” he said providers seeking upside believe they can do a better job at putting efficiencies in expenses — and at getting money from the state for the care they provide their Medicaid residents.

“They believe they can bill Medicaid better,” Rhodes said. “That’s a lot of the problem — a lot of these providers don’t pay attention to the details that they’re billing, and they leave a lot of money on the table.”

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