Matros: ‘We All Knew PDPM Wasn’t Going to Be Revenue-Neutral,’ Doesn’t Expect CMS Clawback

Sabra Health Care REIT Inc. (Nasdaq: SBRA) is optimistic about how the new Medicare reimbursement for skilled nursing facilities will play out among its operators – even if the new Patient-Driven Payment Model (PDPM) doesn’t quite have the results the federal government expected.

Specifically, the Irvine, Calif.-based real estate investment trust (REIT) is seeing PDPM rate growth in the “mid-single digits” for its SNF operators, CEO Rick Matros said on the REIT’s fourth-quarter and year-end earnings call.

The cost reductions related to changes in therapy practices haven’t yet stabilized, but overall there doesn’t appear to be any disruption, and operators appear to be seeing improvements under PDPM.


But that good news might raise the specter of clawbacks, as some analysts noted. PDPM was intended to be budget-neutral, meaning that payments to SNFs under the new system would equal those made under the old Resource Utilization Group –Version IV (RUGs-IV), but early reports suggest that isn’t going to be the case.

For Matros though, this isn’t the same situation as the one that played out in 2011, when the government clawed back significant amounts in overpayments after rates went up more than expected.

“We all knew that [PDPM] wasn’t going to be revenue-neutral,” he said on the earnings call. “But it’s not egregious the way RUGs-IV was. RUGs-IV was double-digit, and we’re not seeing that.”


The REIT reported net income attributable to common stockholders of of 20 cents a share in the fourth quarter of 2019, compared with a net loss of 11 cents per share in the same period of 2018. For the year ending December 31, 2019, Sabra reported net income attributable to common stockholders of 37 cents per share, compared with $1.51 in the year ending December 31, 2018.

In terms of SNF deals, Sabra completed the sale of eight transitional care SNFs, for aggregate sales proceeds of $7.3 million in the fourth quarter; those sales were expected in the portfolio repositioning plans, chief financial officer Harold Andrews noted. The REIT also recorded a $2.7 million impairment primarily related to one SNF that is expected to be sold this year, with no revenue recorded from the asset for the fourth quarter.

Sabra is starting to see SNF volume pick up in the M&A space at “historically stable levels,” and though the REIT’s acquisition pipeline of just under $1 billion is primarily senior housing, it’s starting to see more SNF deals, as well as some behavioral and addiction investment opportunities, Matros said.

Avamere on the upswing

In the third quarter, Sabra reported that one of its SNF tenants, the Avamere Family of Companies, had struggled to work its way through a major information technology update. But that issue was mostly confined to the company’s ancillary businesses, rather than to its SNF business, where the major challenge has been low Medicaid rates in the state of Washington, Matros said.

But the company has implemented all its new systems, and Avamere is also seeing improvement under PDPM, which is contributing to improvement in its coverage and its upward trend during the fourth quarter of 2019 that is continuing into the first quarter of 2020, Matros noted. In addition, it seems likely that Washington will have a Medicaid rate increase this year; the state was one of several notorious for low Medicaid rates that created challenges for operators.

As a result, Sabra isn’t making any major changes to its relationship with the operator, such as it had to make with Signature HealthCARE in 2018.

“We’re not restructuring the leases [with Avamere],” Matros said on the fourth-quarter earnings call. “I think if there were no rate increase in Washington state, then we’d sit down with the Avamere team and see if there’s anything else that we’d want to do there … but we didn’t see a need to rush into that. They’re a strong company, and hopefully now between PDPM and some level of rate increase for Medicaid in Washington state, it’ll be good.”

Signature HealthCARE is also showing improvement, trending up in the fourth quarter and continuing that rise in the early first quarter, Matros said in his prepared remarks. Another operator that the REIT had been tracking, North American Healthcare, is also making sequential improvements.

“We feel really good about where our operators are from a coverage perspective, and all else, for that matter,” he said.

PDPM Positivity, MFAR Caution

The positive effects of PDPM on operators has raised questions about how the Centers for Medicare and Medicaid Services (CMS) will react, but Matros was upbeat about how the government is monitoring the new system.

“I actually don’t expect a clawback. I think CMS, despite some comments, expected some positive growth,” he said.

That doesn’t mean that CMS won’t take action at some point in the future, but it’s more likely to take the form of an adjustment going forward, Matros said.

The Medicaid Fiscal Accountability Regulation (MFAR), which was proposed by CMS in November 2019, is another area of regulatory concern, though as Matros pointed out, any of the rule’s impacts wouldn’t come for at least a few years, assuming it is finalized. The rule, which would affect provider taxes and transfers of funds between government entities used to shore up Medicaid rates, could affect billions in SNF payments.

While Matros was fairly confident about the ability of states to reset their provider taxes and bring them into compliance with the rule, if it takes effect, the impact on intergovernmental transfers (IGTs) and upper-payment limit (UPL) programs could be far more significant, he said. That’s particularly true for Texas, Indiana and Utah.

“From an underwriting perspective, we would seriously take that into consideration, if we were looking at any skilled assets in those three states,” Matros said.

Sabra’s stock closed on Monday at $22.35, up 1.64%.

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