Though the early days of 2020 have brought some optimism around the state of the post-acute and long-term care industry, executives in the space continue to emphasize that the coming 12 months could bring make-or-break decisions for operators and their partners.
One day after American Health Care Association (AHCA) CEO Mark Parkinson told SNN that downward Medicare adjustments aren’t necessarily inevitable this year, we decided to extend our annual executive outlook feature with a third installment of predictions from leaders at operators, trade groups, consulting firms, lenders, and transaction advisors — presented in their own words.
As in our previous two installments, SNN approached a diverse array of leaders with a simple prompt: Talk about the biggest challenges and opportunities for the industry over the coming year. And just like in the past, the responses generally described the landscape in stark terms.
“The question of nursing homes’ viability will continue as a theme in the coming year,” LeadingAge president and CEO Katie Smith Sloan said. “Nursing homes are essential, yet our sector is struggling under current financing and regulatory systems. Without a public policy turnaround, many providers will pare back or cease operations, eliminating a safety net relied upon by hundreds of thousands of older people and their families.”
Read on for our latest dive into the topics keeping executives up at night; the answers have been lightly edited for content and clarity. And if you missed our first two installments, check out Part I and Part II.
Maggie Flynn contributed reporting to this piece.
David Mills, CEO, North Shore Healthcare
This is an exciting, transformational, and challenging time in post-acute care. While we have seen significant change over the past several years, the foundational challenges of adequate funding and staffing remain. Unfortunately, these are complex issues with no simple solutions. Addressing these two key areas must be a central focus in 2020.
It’s encouraging to see how providers throughout the post-acute continuum are coming together in an effort to reshape and develop new delivery models and partnerships. For those that are innovative, willing to accept more risk, and able to execute on these strategic decisions, this is a significant opportunity to make a positive impact on change in the post-acute landscape.
Today’s environment requires providers to be very collaborative and creative. This includes implementing market-driven strategies and specialty programs that drive improved outcomes around quality metrics, census, and staffing. Selecting the right technology solutions that will create efficiencies and improve outcomes will be critical as we move forward in 2020 and beyond.
In 2020, we will gain more knowledge and understanding of the true impact of the Patient-Driven Payment Model (PDPM), which will result in greater financial predictability. With that said, significant work remains in Medicaid funding, and this must continue to be a high priority. As providers, we must continue to advocate for our industry and for those who depend on the care we provide.
There has been significant change to the availability of providers in post-acute care over the past few years, primarily as a result of these financial challenges. I anticipate that this will continue until a better long-term funding solution is achieved.
Katie Smith Sloan, President and CEO, LeadingAge
The question of nursing homes’ viability will continue as a theme in the coming year. Nursing homes are essential, yet our sector is struggling under current financing and regulatory systems. Without a public policy turnaround, many providers will pare back or cease operations, eliminating a safety net relied upon by hundreds of thousands of older people and their families.
In addition, the current workforce shortage will not wane, leaving many providers — already operating under tight budgetary constraints as a result of Medicaid reimbursement shortfalls — in a bind, unable to offer the salaries and benefits available in other settings. At the same time, the acuity and number of chronic conditions in current and prospective nursing home residents will increase. Clearly, something must be done to address this challenging situation, and also ensure that older adults and their families have access to much-needed care.
Older baby boomers recognize a need for residential care. Indeed, the older adult (aged 60-72) respondents to our 2019 survey, conducted in collaboration with NORC at the University of Chicago, demonstrate that older baby boomers would want to live somewhere other than their current home or apartment if they have a physical and cognitive impairment.
We believe that providers will evolve in the type of product and service they offer; many will do so in collaboration with their communities. We all need to begin to envision what new models might look like.
We are hopeful that along with this evolution, we will also see fresh engagement from policymakers and other stakeholders in an effort to revisit our current delivery, regulation, and measurement of quality care in nursing homes, such as currently under consideration at the National Academies of Sciences, Engineering, and Medicine (NASEM).
Finally, as the U.S. population ages, and more older adults need long-term services and supports, we predict discussions about long term care financing will increase. While progress toward policymaking at the federal level may be slow-going, activity at the state levels — such as has occurred in Washington, Hawaii, Minnesota, Michigan, and elsewhere — will continue.
Irving Stackpole, President, Stackpole & Associates
As Yogi Berra said, “It’s tough to make predictions, especially about the future.” Yet regarding the SNF market dynamics, here are a few about the year ahead.
It will get worse
The social impacts and the economic effects — bad debt, bankruptcies, and loss of jobs — of nursing home closures will grow as closures increase. The SNFs that will be disproportionally affected will be those serving rural communities, and the poorest, most vulnerable patients.
The sector will get serious about efficiencies
Your local grocery stores and hotels have more and better technology than nursing centers. SNFs are the land that “meaningful use” left behind. The SNFs that survive in 2020 will take some of the CMS pay increase they’ll get and will insist on better technology to really, measurably improve efficiency — not just kiosks that hang on the wall.
The M&A market will correct
Daniel Kahneman, in “Thinking, Fast and Slow,” describes the difference between buying and selling assets — there’s more analysis that goes into what organizations buy than into how they sell those same assets. There’s previously been so much consolidation that the buying frenzy has bid up asset prices. As bad assets proliferate, they are going to negatively impact perceptions about the market and force a price correction.
Bill Janis and Mario Wilson, Managing Directors, Helios Healthcare Advisors
2020 will be a very exciting year for the skilled nursing industry. It’s hard to give new insight on PDPM that hasn’t been discussed before. Despite the headwinds, we do see opportunity for smaller providers in secondary markets to offer higher-acuity, specialized services such as pulmonary or dialysis care.
Many operators have fear about the growth of accountable care organization (ACO) networks. Despite their tendency to favor lower-cost settings for their discharges — i.e., home care — a number of these ACOs are realizing that hospital readmission rates are higher in these lower cost-settings than in a nursing home.
An equally concerning issue for the skilled nursing industry is what lower-acuity senior care providers are doing. We have seen a number of assisted living communities build rehab gyms. This is achieved either by renting out space to a therapy company, or actually obtaining the license and providing these services themselves. From a marketing standpoint, it’s easy to see how a post-acute patient might feel more comfortable receiving care in a more vibrant community with healthier residents.
Aggressive minimum wage increases in some states are putting a huge strain on operators’ bottom lines. A lot of active buyers are budgeting 6% to 8% payroll increases into their pro formas when underwriting a facility to purchase. Beyond this, states continue to increase staffing requirements and regulatory pressures for nursing homes. There are a number of cost-based states which bumped up minimum staffing requirements, but won’t actually reimburse providers for their higher payroll costs until their cost reports reflect them — sometimes up to two to three years later.
We’ve seen providers who have been most successful in handling staffing shortages also have ancillary service businesses. A provider who also has a home health, hospice, or therapy company has more flexibility to move their staff around and fill shifts at their facilities. When a facility can’t compete on a compensation or benefits basis, culture will be key. Providers who successfully empower their caretakers, and consistently show appreciation, can still maintain manageable payroll costs even in higher income markets.
Jason Dopoulos, Senior Managing Director, Lancaster Pollard
As a lender in 2020, there are a few themes that we will be focused on when looking at transactions. The first one is the shakeout from PDPM. We have a few months of performance to analyze, and we have seen many of our operators exhibiting positive reimbursement levels from the changes.
Monitoring these trends will be important, as the program is designed to be neutral, so there will be some operators who will exhibit some negative metrics due to PDPM. How these operators respond will be something to be monitored closely, as this could cause smaller operators to decide to sell or cause issues for those who are only tenants. This could cause some poor-performing assets to hit the market, which could lead to a reduction in per-bed value out in the market — which in turn could impact the general M&A market for skilled nursing.
We also are closely monitoring the staffing expenses of our prospects and clients. We have seen, in many markets, the cost of labor shoot up, which can put a real dent into the net operating income of facilities that we are underwriting. Operators with lower turnover will be much more well-positioned to thrive in 2020.
I expect the capital markets for skilled nursing to remain pretty consistent to what we see today. HUD will remain a major player in the permanent debt market, with some specific REIT buyers also being an outlet for permanent financing. A specific group of banks and finance companies continue to provide short-term debt that is vital for the M&A market, which I see continuing in 2020.
We are bullish on the sector and will continue to focus on financing this very important part of the health care world.
Chad Elliott and Laca Wong-Hammond, Managing Directors at OREC Securities, LLC, an affiliate of ORIX Real Estate Capital
Building off of both 2019’s improving sector fundamentals, as well as the regulatory clarity provided via PDPM implementation, optimism is definitively accelerating amongst all SNF stakeholders into the new year.
And in conjunction with a broader transition from a low interest rate environment with higher uncertainty surrounding recession, inflation, (tariffs), and other interest rate “signaling” in the first half of 2019, to the second half (and current) significantly more benign outlook for a more persistent and healthy low rate environment over the next 18 to 24 months, SNF acquisition cap rates are appropriately compressing and increasing asset values. And this positive SNF-market outlook — harbored by sector-specific, “dedicated” investors looking to invest incremental capital — continues to fuel the influx of yield-thirsty, new capital via generalist, “non-dedicated” institutional investors seeking SNF acquisitions and other capital deployment vehicles.
Owner/operators of almost any size will have a fairly steady 12-to-24-month window to leverage these positive industry dynamics to optimize major strategic decisions regarding their future — primarily decisions to grow:
- organically with increased data-driven focus on their existing potential patient base and collaboration with referral sources;
- through acquisition via an increasing number of target candidates coming to market or willing to sell, and/or;
- through creative JVs with other strategically positioned providers within the sector, or tangential — hospitals, home health, et cetera.
Alternatively, divestiture of the real estate, either with or without the op-co assets, will be the optimal strategic decision to take advantage of this robust capital market — when such decision outweighs continuing to compete with other operators that are highly focused and engaged (on PDPM, et cetera), nimble, and only increasing their regional expertise.
From a sector-wide headwind perspective, we only anticipate wage inflation, including nursing shortages, and uncertain presidential election results as potential overhangs or dampeners to this extremely bullish market. And, of course, on a statewide basis, the relative level and certainty of Medicaid rates — including strength of the program generally vis-à-vis potential federal contribution changes and capacity of state budgets — will continue to be a decisive factor impacting asset values within state lines.