‘An Alarming Metric’: Median Skilled Nursing Operating Margin Falls Below Zero

The median operating margin at the nation’s skilled nursing facilities sank underwater for the first time in 34 years, according to one long-running analysis, with the lowest quartile of properties sitting at -6.5%.

After hovering at about 0 in 2017, the median figure dipped to -0.1% in 2018, consulting firm CLA announced in its 34th annual skilled nursing cost comparison report, released Thursday.

“This is an alarming metric for the industry, as this number reveals that roughly half of the SNFs in the country are not operating at a profitable level,” CLA’s Cory Rutledge, Matthew Wocken, and Seth Wilson wrote in their report. “Given the multi-year trend of declining industry margins, this calls into question the long-term financial viability of lower performing SNFs.”

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The top properties, those in the 75th percentile, had an operating margin of 4.5% last year, according to CLA, while the bottom 25th percentile reported margins of -6.5%.

CLA’s margin-trend breakdown.

The CLA team pointed to a series of usual suspects when describing the decline: Additional regulatory pressures, reimbursement drops, and a tight labor market have all conspired to reduce operators’ margins over the last half-decade.

“This trend in decreased operating margins supports the premise that the status quo will no longer suffice for SNFs moving forward, and that SNFs must pursue bold strategies to find long-term sustainability,” the group wrote.

Not all of that pain has been distributed equally, however. CLA observed a clear gulf between the haves and have-nots in the skilled nursing space, separated by star rating.

Properties with Centers for Medicare & Medicaid Services (CMS) scores of three stars or above had positive median operating margins, while one- and two-star properties were in the red on a median basis — prompting CLA to identify star ratings as “one of the most insightful indicators” of financial performance.

“A heightened emphasis on star ratings from hospitals, health plans, and consumers has increased the importance of these ratings for SNFs,” the CLA analysts noted. “With the health care industry transitioning payment toward value and quality, this rating can impact financial performance.”

That cause-and-effect relationship also extends to occupancy: One-star facilities had median occupancy rates of 79.3% in CLA’s analysis, while five-star properties boasted median census of 88% — above the overall 83.3% figure most recently reported by the National Investment Center for Seniors Housing & Care (NIC).

As for strategies to combat these persistent problems, CLA found a potential solution in separating the short- and long-term care aspects of an individual SNF’s business model. Noting that the proportion of Medicare days has consistently declined — in tandem with a rise in lower-revenue Medicare Advantage and Medicaid days — the consulting firm advised operators to think of their Medicare-driven short stays and Medicaid-covered long stays as two completely separate animals.

“We believe that operators are wise to operate and measure their business in two distinct categories — short-term rehabilitation residents and long-term stay residents,” the team wrote. “By optimizing these two very different resident types, SNFs can more effectively manage their operations and financial outcomes.”

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