PDPM Hasn’t Caused a Skilled Nursing M&A Wave Just Yet — But Could Next Year

Predictions that the Patient-Driven Payment Model (PDPM) will trigger a wave of skilled nursing M&A action either have not yet taken hold or won’t come true until the new year, according to multiple players who spoke to SNN on Wednesday.

The burden of extra work related to more stringent quality data requirements and reimbursement changes hasn’t yet increased sales in the skilled nursing sector since PDPM went into effect October 1.

Isaac Dole, founder and managing partner of the Chicago-based Birchwood Healthcare Partners, and Matthew Alley, managing director of Senior Living Investment Brokerage (SLIB) of Glen Ellyn, Ill., haven’t received a flurry of calls from owners hoping to dispose of their SNFs.

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“I see very little increase in sales due to PDPM,” Dole said. “PDPM is simply one more variable that operators have to navigate in this increasingly complex industry,” Dole said.

Various voices had predicted a sell-off in the months leading up to PDPM’s implementation, with the prevailing wisdom holding that the new model would be the inciting incident for smaller operators already weighing the idea of leaving the marketplace.

Back in 2018, Omega Healthcare Investors (NYSE: OHI) CEO Taylor Pickett pegged PDPM as the latest trigger for industry consolidation.

“Each iteration of more sophistication in this business has driven the consolidation. It’s been the model that we’ve run forever,” Pickett said on an earnings call. “It’s just another iteration of what has caused the consolidation of this industry over the last decade. If history holds true, we’ll see some of these local operators just say: ‘Okay, I’ve had enough. I’m not going to go through this next change.’”

That sentiment carried into the spring, even as the lead-up to PDPM didn’t necessarily trigger a preemptive sell-off.

“A lot of the mom-and-pops, whether it’s labor pressure — I think it’s a confluence of things,” Mark Lamb, chief investment officer at CareTrust REIT (Nasdaq: CTRE), told SNN earlier this year. “I think PDPM probably weighs a little bit more as you have folks factoring what they want to do. I think labor pressure, PDPM — that could be the straw that breaks the camel’s back if somebody’s on the fence.”

Dole, for instance, pointed to a few rehabilitation facilities as part of a small pool of operators who “don’t want to deal with implementing PDPM. But I can only think of one that specifically referenced PDPM as a driver in their decision to sell.”

Like Lamb before him, Dole referred to PDPM as potentially the “final straw” for mostly smaller owners feeling beaten down by dealing with increasing labor costs, declining average lengths of stay, and slower and lower reimbursement for years.

Four additional reasons that could motivate sales in the skilled nursing sectors, according to Dole, include:

  • Increased dependence on statistical measures of clinical operations, which determine the facilities’ success with referral sources
  • Difficulty in balancing Medicare & Medicaid reimbursements with payroll in a timely manner, given the diversity of payers and payer systems
  • The complex nature of maintaining consistent occupancy with a quality mixture of patients
  • Obstacles in managing and supporting staff, including overtime wages and high turnover

“Without some scale, all four are hard to achieve,” Dole said.

Alley also has not seen an increase in SNF sales based on the new PDPM model.

“With most major reimbursement changes, the increase in independent or mom-and-pop owners interested in selling happens over time as these groups begin to understand the difficulty and cost in adjusting their systems to take advantage of these changes,” Alley said, adding that the mid-sized and larger operators are more able to take advantage of changes to reimbursement.

SLIB expects an increased volume of sales starting in 2020, when there’s been more time to evaluate how PDPM is affecting financial stability in particular SNFs. Some groups may choose to sell right away, whereas others “may want to hang on for a longer period of time,” he said.

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