Ensign Rides High-Acuity Skilled Nursing Model to 6% Rate Gains Under PDPM

The Ensign Group (Nasdaq: ENSG) on Thursday announced that its skilled nursing facilities have seen rate increases of up to 6% under the new Medicare payment model, in part helping to drive the post-acute leader to another set of record earnings.

The company’s established same-store facilities achieved those 6% gains, while Ensign’s transitioning facilities — defined as buildings acquired in 2016 and 2017 — saw 3% boosts during the first quarter of the Patient-Driven Payment Model, even after adjusting for the blanket 2.4% market basket rate increase for Medicare payments.

“Our focus is on acquiring unsophisticated buildings and transforming them into an acute, clinical powerhouse,” CEO Barry Port said during the company’s fourth-quarter earnings call. “Part of that transformation is raising acuity, and you see that in the difference in the rates between those two buckets.”

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But Port and the rest of the executive team at the San Juan Capistrano, Calif.-based operator insisted that there’s more potential for growth among the more recently purchased properties — and that PDPM was only one part of Ensign’s solid fourth quarter and overall 2019.

“While we experienced a modest rate improvement in our first quarter under the new system, the lion’s share of our performance during the quarter is totally unrelated to the PDPM impact,” Port said. “We want to remind you all that this is just one quarter, and we believe it will take several more quarters to have a better sense of the long-term impact of PDPM.”

As has become routine for Ensign, the provider reported record earnings per share for the last three months of 2019, with net income of $91.7 million — or a boost of 54.1% from the fourth quarter of 2018. Ensign also logged occupancy gains in both the same-store and transitioning buckets — 216 and 279 basis points, respectively — as well as jumps in skilled mix and skilled days.

For the year, Ensign logged revenues of $2.28 billion, up 19% from 2018.

While PDPM played a role in the company’s performance, Port mostly trumpeted the success of Ensign’s local leaders in turning around the distressed properties that management favors as acquisition targets. In particular, the CEO cited a 242-basis-point increase at a Texas campus that worked to take on higher-acuity residents, as well as an Arizona property that raised census from 77% to 90.7% in just two years by working closely with managed care partners.

“We have not even come close to reaching our full potential,” Port said.

Port also noted that the increased PDPM revenue came with a corresponding rise in certain expenses such as nursing costs, while chief investment officer Chad Keetch emphasized that investors and analysts shouldn’t draw big-picture conclusions about the new model based on Ensign’s results.

“While that’s been our experience, it’s not a comment on other buildings in the space,” Keetch said. “The acuity level in our buildings isn’t necessarily representative of what you see in, for example, a building we’re looking to acquire.”

But the tailwinds have encouraged Ensign to continue eyeing growth in 2020 and beyond, particularly in markets where it already has a foothold.

“As we saw last quarter, the pipeline for our typical turnaround opportunities and well-priced strategic deals remains strong,” Keetch said. “We are still being very selective and are keeping plenty of dry powder on hand for what we believe will continue to be an attractive buyer’s market.”

Ensign now claims 225 skilled nursing and other health care facilities in its portfolio, 92 of which it owns — about the same proportion of real estate assets as it had when Ensign spun out CareTrust REIT (Nasdaq: CTRE) in 2014. Though Keetch hinted at Ensign’s desire to eventually unlock some of the cash in those assets, he emphasized that there were no firm plans at the moment.

Port was even upbeat about the Medicaid Fiscal Accountability Regulation, a proposed rule that stands to potentially cut annual reimbursements to nursing facilities by a total of $50 billion. Citing the advocacy work of groups such as the American Hospital Association, Port expressed optimism that the rule will not be finalized in its current form.

“CMS put out some initial proposals that we don’t believe will stand as they were initially released,” he said. “We don’t spend a whole lot of time worrying ourselves about that. We know there’s a lot of support behind making sure there’s a tempered approach taken by CMS.”

Ensign shares rose $4.26 to reach $52.16, a gain of 8.9%, in Thursday’s trading.

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