Why Skilled Nursing Operators Can’t Bank on ‘Silver Tsunami’ — or One Good Month Under PDPM — for Relief

As the post-acute and long-term health care industry struggles through shortened lengths of stay and compressed reimbursements, an oasis has lingered just beyond the horizon: the so-called silver tsunami.

If operators can wait out the current downturn, the thinking goes, the glut of baby boomers turning 80 and older over the coming years will be a soothing tide that will lift all boats in the nursing home space.

But at least once key leader believes that waiting for the demographic miracle is something of a fool’s game.

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“I think that if, as an operator or an investor, you are banking on demographics to come to the rescue, you’re probably not going to be successful,” Dave Sedgwick, chief operating officer of CareTrust REIT (Nasdaq: CTRE), said during a Wednesday panel discussion at the National Investment Center for Seniors Housing & Care’s (NIC) annual fall conference in Chicago.

The recent past — which has seen operators struggle with quarter after quarter of declining occupancy, lower reimbursements under payment models such as Medicare Advantage, and cash-strapped state Medicaid programs — served as Sedgwick’s evidence that it’s going to take more than pure volume for skilled nursing providers to succeed over the coming years.

“If you look at the operators in the space — the last 15 years, when demographics were not in their favor — you see winners and losers. You see incredible success stories, and you see bankruptcies,” Sedgwick said. “As we look at the demographics, we don’t necessarily make any investment decision based on what we think the demographics are going to do or be in this market going forward.”

The existence of strong, successful operators in historically difficult local markets also indicates that the demographic wave won’t be a cure-all, according to American Health Care Association president and CEO Mark Parkinson.

Texas and Illinois both have notoriously tough operating environments for skilled nursing facilities, but Parkinson pointed out that some operators continue to find success in the Lone Star State and the Land of Lincoln.

“Even in an incredibly difficult market, there are people that are demonstrably doing well,” Parkinson said.

Sedgwick and Dava Ashley, president of operator Covenant Care, both emphasized that a bigger pool of Americans who require post-acute and long-term care will be a positive factor. But they also stressed that operational success rests firmly in local leaders that know how to navigate the specific landscape of their markets.

“It really is dependent on the local operation,” Ashley said. “Health care’s a very, very local business.”

Sedgwick pointed to his experience working at industry leader The Ensign Group (Nasdaq: ENSG), a 202-SNF chain that spun off its real estate to form CareTrust back in 2014. Ensign frequently cites its unique operational model for quarter after quarter of solid earnings and steady expansion: Instead of a top-down structure, individual executive directors have wide latitude to make decisions on their own, empowering them to more quickly adapt to their local markets.

Part of that success has stemmed from Ensign’s focus on attracting a unique population into the nursing home space: MBAs. Sedgwick spoke of trying to sell recent MBA grads on joining the nursing home industry, often following recruiters from such blue-chip names as Ford and Intel.

Though senior care might not seem to be a logical competitor for those industries, Sedgwick’s pitch focused on the autonomy and responsibility that can come to leaders in the space almost immediately — while MBAs at corporate giants may wait decades for that kind of clout.

“Do you really want to sit in a cube for 15 years?” Sedgwick said.

Ensign’s model represents an extreme, Sedgwick noted, with local executive directors and directors of nursing enjoying a nearly unprecedented level of autonomy. But operators looking to take cues from the San Juan Capistrano, Calif.-based SNF giant don’t have to copy it exactly to find success.

“You don’t have to go to that extreme in order to value and give the importance to that ED/DON local combo meal that then gives you the ability to become the employer of choice — in order to become the provider of choice,” Sedgwick said.

Parkinson, for his part, expressed optimism about the future of the skilled nursing space, cautiously declaring that the industry may have turned a corner after the annus horribilis of 2017 — which featured bankruptcies, uncertainty over Medicaid funding, and persistently low occupancy.

“I don’t know if we can completely declare victory right now, but I think we’re doing measurably better, moderately better than we were a couple of years ago,” Parkinson said.

The rise of provider-sponsored Medicare Advantage plans — known as Institutional Special Needs Plans, or I-SNPs — represents the most exciting innovation in Parkinson’s 25 years in the industry, he said, and the Patient-Driven Patient Model (PDPM) will likely prove beneficial to the space when it takes effect on October 1.

That said, Parkinson cautioned both operators and investors to let PDPM develop over the course of several months before jumping to conclusions, warning that the first month will bring some unsustainably gaudy reimbursement numbers.

“Everybody’s going to have the best October they’ve ever had,” he said.

In particular, Parkinson said investors should hold off on refinancing operators’ loans based on a few solid months under PDPM, as the Centers for Medicare & Medicaid Services (CMS) is likely to make adjustments to prevent providers from shifting their care strategies based solely on reimbursements — and not resident need.

Parkinson gave one piece of advice to lenders who might receive mid-November phone calls from operators asking for a refinance while citing October data: “Just hang up.”

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