Mixed Skilled Nursing Projections for 2020: Increased Demand, But Margin Pressure Continues

Increasing demand for skilled nursing services is a good sign for the industry, according to several experts who spoke on SNN’s annual outlook webinar, but a continued squeeze on margins may affect some facilities’ ability to keep their doors open in 2020. 

Although the Patient-Driven Payment Model (PDPM) looks like good news, with increased reimbursements and opportunities for cost savings, it’s too soon to tell — and with varying state-based Medicaid regulations, increased wages, and more complex coding and documentation demands, everyone needs to stay on their toes. 

Transaction trends

It’s a mixed bag for transaction trends, with a slight drop in volume towards the end of 2019 — although there’s still plentiful liquidity and a lot of deals being closed, Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care (NIC) said during the webinar, held Tuesday.

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Across closed transactions, private buyers of senior housing and skilled nursing facilities are fueling the most transaction volume — with public, institutional, and other buyers trailing behind.

“Private buyers are providing a tremendous amount of liquidity in the market, including skilled nursing, which involves family offices, private REITs, and institutional money managers, such as the Carlyle Group and Blackstone,” Kauffman said.

The average price for nursing beds showed growth, according to NIC data, with reaching $78,000 in the third quarter, Kauffman said — compared to a recent cycle low of about $66,000 last year. But that figure belies a wide distribution: The median price in that quarter sat at $68,000, with the lowest decile at just $32,000 per bed — and the highest decile reaching $134,000.

Since 2018, low occupancy rates have begun to stabilize, according to NIC, which most recently pegged the nation’s nursing homes at about 83.6% full in the third quarter, or relatively flat from the previous three-month period. But that flat occupancy came with a caveat: Medicaid, which provides the lowest per-patient-day reimbursements, now accounts for a record share of both resident days and overall revenue.

“Over 51% of revenue is coming from Medicaid, which is continuing to grow,” Kauffman said.

So although the Medicare growth rate sits at 2.4% year over year, budgetary Medicaid constraints in certain states and a 5% uptick in wages remain pressures.

The growth of managed Medicare also represents another consistent issue for nursing homes, with revenue per patient day lower than fee-for-service revenue. In September 2019, NIC data showed $431 revenue per patient day for managed Medicare versus $523 for fee-for-service, a significant gulf in revenue, Kauffman said.

PDPM’s slow impact

As operators continue to manage the transition to the new Medicare payment model, thorough coding and documentation remain opportunities for owners, Fred Bentley, managing director of consulting firm Avalere Health, said. Smaller nursing home chains in rural areas that have put their heads in the sand amid the PDPM shift will find “reimbursement repercussions to be pretty significant” — although the skilled nursing space won’t fully feel the results of PDPM until 2020.

“In some instances, it does mean scaling back on therapy — but not maybe as much as the industry had supposed. But it does raise big questions around: How do we manage these patients effectively in an ethical and appropriate way to maximize revenue under the new mode?” Bentley added.

More attention needs to be focused on readmissions to hospitals, Bentley said, suggesting that many SNFs aren’t tracking this major expense nearly enough.

“It’s maybe one of those sleeper topics that was eclipsed by PDPM but is a really big deal, especially in an industry with thin margins,” Bentley said.

ACOs: Potential for long-term success

The presence of accountable care organizations, alternative payment models that further pressure operators to reduce costs by decreasing lengths of stay, are yielding significant savings — especially after they’re in place for three or four years, Bentley said.

“Now the big contingent is that those savings are coming out of your hide. I’ve worked in enough markets to know that some ACOs are really going after skilled nursing care in a meaningful way,” Bentley said, though he also suggested that engaging with them may add value.

“But we do know of ACOs out there that recognize the value of a good working relationship with skilled nursing providers,” he said.

He expects to see more activity among nursing home-focused physicians incentivized to develop ACOs “to collaborate on clinical care, and potentially partner on gain-sharing models.”

Bentley also exhorted operators to be more proactive in working with Medicare Advantage plans, which currently cover about 36% of all Medicare beneficiaries — a number that, while already a pressure for nursing home operators, will only increase.

“Avalere anticipates [enrollment] will crest 50%, and that is already the case in many of the markets where more than one out of every two Medicare beneficiaries are enrolled in Medicare Advantage,” Bentley said.

Based on that trend, he noted that operators have two options: complaining about tightening utilization and the reduction of reimbursement rates, or engaging with the plans that will inevitably dominate many markets.

One of those potential paths to engagement is the Institutional Special Needs Plan (I-SNP), an in-house Medicare Advantage plan that many operators have explored — and launched — in recent years. Like many other consultants, Bentley allowed that the process is difficult and not for every provider, but asserted that it’s important for operators to at least explore the option before deciding against it.

“This is not for the faint of heart,” Bentley said, acknowledging that becoming an insurance company has different requirements, opportunities, and risks. “I do think there are some organizations are going to get burned in this, but it is a step worth taking — and one that signals that you’re not going to just take this shift to Medicare Advantage lying down,” Bentley said.

PDPM fuels M&A

Matthew Alley, managing director at Senior Living Investment Brokerage (SLIB), believes PDPM will spur on an additional supply of available skilled nursing facilities on the open market, ramping up by the middle of next year.

“As we say in the brokerage industry, any change is good change from a transactional perspective,” Alley said.

The larger operators will benefit more than smaller ones, he said, and although there will be more facilities on the market, Alley cautioned against assuming that a major flood will occur all at once. Smaller chains will do their best to work with the new PDPM parameters before making a big change, he predicted.

Even with those projected increases in M&A, certain parties are off the table as buyers. Nursing homes aren’t likely to be sold to health systems and hospitals over the coming year, Alley said, noting that those providers are generally not well equipped to operate in the long-term care space.

“So unless they do it on a large scale, and hire all of the right people with experience in the industry, it’s not something that hospitals and health systems would be able to successfully put into place,” Alley said.

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