Ensign: PDPM’s M&A Effects Could Stretch to 2021 as Payment Delays, Lack of Prep Push Operators Out

Since the day the new Medicare payment model for nursing homes was announced in 2018, leaders in the space have predicted a wave of sell-offs as small operators head for the exits rather than adapt.

The jury remains out on the Patient-Driven Payment Model’s (PDPM) near-term effects on nursing home sales, but executives at one of the top operators in the space on Thursday predicted that its influence on the mergers-and-acquisitions market will last years.

“You’ll have some people that might even try to hang on and try to figure it out, so even into 2021 and beyond, there probably will continue to be opportunities from people deciding either to give up, or not financially be viable enough to continue,” Ensign Group (Nasdaq: ENSG) CEO Barry Port said during a presentation at the 2019 Stephens Nashville Investment Conference in Nashville, Tenn.

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Port and other leaders at the San Juan Capistrano, Calif.-based skilled nursing giant framed that predicted glut of available properties as good news for its already robust acquisition pipeline: Given the company’s long-standing strategy of taking on underperforming assets and turning them around with new leadership, PDPM bailouts would give Ensign a wide range of options from which to choose over the next two years.

“We represent less than 1% of market share across the United States,” chief investment officer Chad Keetch said Thursday. “There’s just a lot of levers we can pull to continue to do what we do, and achieve the performance that we have so far.”

After wrapping up a six-building pickup earlier this month, Ensign boasts a portfolio of 208 skilled nursing facilities, primarily concentrated in the western U.S.; the Centers for Medicare & Medicaid Services (CMS) typically pegs the total number of American nursing homes at more than 15,000.

Ensign has built its public brand on a deceptively simple formula: taking over struggling properties, installing local leaders that are given wide latitude to make decisions independently of the national executives, and buttressing its regional operating platforms with a central office for claims processing and other behind-the-scenes functions.

In an era marked by seemingly constant operator struggles, Ensign has at least for now remained above it all, most recently boasting yet another solid quarter of earnings while also revealing impressive long-range stats regarding the company’s turnaround capabilities — including occupancy and skilled mix boosts of more than 1,000 basis points for properties in its portfolio for more than a decade.

That said, Ensign remains the exception and not the rule. Investors and operators have long predicted that PDPM would be the straw that broke weaker providers’ backs, with leaders simply deciding to bow out instead of assimilating with the first major Medicare payment shift in two decades.

Part of what made the October 1 transition to PDPM particularly distressing for some operators, Keetch said Thursday, was its abruptness; unlike in the past, when CMS delayed changes or phased them in slowly, the federal government didn’t bluff when flipping the switch.

That hard stop and start may have caught some operators off guard — especially those that assumed CMS would take the same lackadaisical approach to the changeover as it had in the past.

“This time, they said October 1, and it was October 1,” Keetch said. “I think there was some sense from a lot of folks out there — ‘let’s put our head in the sand a little bit, and hope that this doesn’t happen’ — when it actually did.”

And at a time when operators have multiple other worries, from flagging Medicaid reimbursements to a tight labor market, simply making payroll and maintaining baseline levels of care takes up most of their time.

“PDPM is the last thing on their list. There’s a lot of quality operators out there that are doing the right things, and preparing, and will do fine under PDPM,” Keetch said. “The types of folks that we’re talking to, our potential acquisition targets, certainly have a lot of work to do.”

In addition, chief financial officer Suzanne Snapper pointed to delays in Medicare claims payments as the government adapts to the new calculations and paperwork requirements.

“One of the things that we’ve seen for sure in the fourth quarter is a little bit more lag on the cash payment side, which could hurt a smaller operator that’s on the edge,” Snapper said.

The Ensign executives also took pains to contrast small-operator uneasiness about PDPM with their own preparations, which included extensive training and software upgrades designed to ease the transition. Unlike other major operators in the space, Ensign hasn’t laid off any therapy workers in the immediate wake of the PDPM change, Port noted; the shift away from therapy minutes has actually allowed the company to “redeploy” some of those therapist resources into programs for long-term care residents that hadn’t traditionally received therapy in the past due to a lack of direct reimbursement incentive.

But that doesn’t necessarily mean Port has seen the same level of preparation at some of the facilities Ensign has evaluated since October 1.

“It’s a little scary to see what’s not happening out there,” Port said of the overall landscape. “I don’t know how others are not doing what we’re doing. That sounds arrogant, but it requires a lot. It’s a sophisticated program to implement effectively.”

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