‘Nobody Would Qualify’: Skilled Nursing Lenders Adapt to Difficult Medicaid Math

Operators have begun to settle into the Patient-Driven Payment Model, the overhaul for Medicare reimbursement that took effect for skilled nursing facilities last year.

But most nursing home residents will be covered by their state’s Medicaid program, and reimbursement shortfalls across the country have created a landscape where most nursing homes are barely breaking even — to the point that financial companies have had to overhaul how they assess SNFs’ financial health.

Donika Schnell, who recently joined the New York City-based investment firm Greystone as a managing director, has seen these challenges from a variety of angles during her career. She’s managed health care lending portfolios throughout her time in banking, including providing term loans for acquisitions, refinancings, and bridge lending solutions across various sectors in health care.


SNN caught up with Schnell to talk about the challenges related to making Medicaid math work for nursing homes, the effects of PDPM, and how private equity is affecting transactions, among other topics.

What’s the profile of the skilled nursing operators you work with in your financing work?

I always think it’s more important who you lend money to than what you lend money on. So I look for operators with experience. Size really doesn’t matter. The owner-operators — and more importantly, the operator’s experience is very important. Do they know their markets? Do they know their niches? Do they understand the reimbursement that’s in in their states? And are they partnering with the providers in their communities to deliver that continuum of care?

They could have three homes; they could have 15 or 20. This just depends on their sophistication, or their level of experience. And then: Are they great at reporting? Because we’re providing a lot of capital to these guys. So we want to make sure we have quality reporting, and as [Department of Housing and Urban Development] (HUD) lenders, that’s of course also a requirement from the [Federal Housing Administration] (FHA).


There’s not a one-size-fits-all either; they all have different financing needs, depending on the equity that they have in the homes. And if it’s a turnaround situation, what can we underwrite to? Mostly focusing on the expense side, that’s easier to underwrite to and confirm. The increase in occupancy translating into revenue, that’s a little harder. We hear that all the time — we have for years — and it didn’t always translate into [profit and loss statements]. So I think lenders are a little more cautious on the revenue side, for revenue increases.

If you can’t translate occupancy to revenue, what would you look at? Is there any metric in particular?

It depends. Don’t you love that answer? It depends. If the provider is in Massachusetts [for instance], which is heavy in accountable care organizations (ACOs), you can feel more comfortable about occupancy because they’re in the ACOs, and in those situations we look at the contracts and those relationships with the referring providers. So we make sure we get comfortable, that those are solid relationships.

You know, the shift from Medicare to Medicaid kind of mucked up the occupancy reliability. I’ve been doing this for almost 30 years, and way back in the olden days, when we did our projections, we assumed 100% Medicaid and looked at cash flow that way as one of our downside scenarios. And we can’t do that today because nobody would qualify. But it was always a check-the-box: “How bad would be it be if we went to 100% Medicaid?”

But the Medicare patient being there for less than 30 days has kind of messed up the occupancy.

Do you have any kind of specialty in terms of the work that you do with providers? Or is it more of a range?

I came out of the provider space as a grunt with an accounting degree. And I didn’t like accounting. I was recruited by a finance company that financed medical receivables. This was in like 1994, when Medicare had released a little bit of their lending rules on accounts receivable, on government AR. I then became an operations manager; I love the idea of checks and balances, and then also providing good care to customers, because we manage their working capital.

Then I was also an ops manager for real estate financing and cash flow; so private equity groups that are buying up health care companies, we would finance those acquisitions. I was at CapitalSource for almost 11 years, and I sold all those products; I sold into all the sectors in health care, and then more recently, when I went to MB, there already was an existing portfolio in Illinois skilled nursing.

That’s a tough portfolio. I give a lot of credit to those skilled nursing operators — I see them scratching and crawling for every penny. Their Medicaid-pending patients, they don’t get paid, approved for months and months and months, but they’re still taking care of our sickest elderly people in our communities. And so when I looked to leave banking –—which is just so strict and a little more difficult, they’re not as flexible in banking because of the regulatory environment they’re in — I thought to myself: I really like health care real estate.

I think health care real estate is solid. I’ve seen us go through cycles, and most of the owners and operators have come out pretty well through those cycles. A little bruised and battled, but they they turned out okay. Greystone’s gone through the same cycles. They’ve been in the industry as long as I have.

One thing you mentioned is working with private equity; can you talk a bit about whether you’re seeing it make any moves in the SNF space?

Yeah, private equity is a massive world. There’s probably $2 trillion sitting in private equity funds ready to deploy, and health care, if you look at it historically, has performed well through recessions because we need health care. So the traditional private equity firms have invested in, over time, behavioral health, home health companies — not typically providers with real estate.

But in recent years, probably in the last couple years, part of the result is they have to deploy this capital that they’ve raised. So they’ve looked to other sectors, and now they’re investing in skilled nursing and senior housing — especially senior housing. Skilled nursing, sometimes you get a little wigged out about the the reimbursement rates and some of the headlines we have. But there’s some funds that have been raised, specifically to buy nursing homes and senior housing.

They’ve entered into the market over the last maybe three years, four years. And some of them are former operators. They’ve been able to raise funds with the investment thesis of buying into the sectors [where] they can operate them as well. We’re seeing that some of the money coming in is probably increasing the value.

I don’t think they’re trying to do that, it’s just more bidders for homes, so it’s raising the price of these facilities. I think there’s a little bit of that happening already, and especially in skilled nursing, the values are pretty high right now.

And folks are now looking at senior housing, or they’re diversifying, like we’ve seen the REITs do over the last three or four years as well. There’s just so much money to deploy, and everyone’s looking for a place to put that money, those investments.

I remember chatting with a private equity investor at a conference, and when he learned I covered skilled nursing, he told me he wouldn’t even touch it.

Yeah, they hear Medicaid, taking care of Medicaid patients, and they’re like, “That’s a loser.” And they’re not wrong! There are no profit margins, by definition; there’s very, very slim profit margins. That’s why I give those providers a lot of credit; they take care of our sickest elderly, and they’re not going to get paid much for that. It’s not for all altruistic reasons, but they’re not going to get private jets out of it.

I think skilled we need. You walk through a nursing home, there’s nowhere for those patients to go. But I saw when the recession hit, our [assisted living] facilities emptied out right away. Those were vacated. Because, you know, it’s not a need.

One thing in terms of payment I wanted to make sure I checked on was the impact of PDPM. Has it changed the work that you do, or is it too early for that to start yet?

I think everyone was really prepared for PDPM. It’s almost like the Y2K event. There’s so much talk about it, and everybody got on board and everybody asked everybody about it: What are you doing about PDPM? I think it’s been either neutral or a small bump here and there, but pretty good so far. No one’s panicking; nobody’s saying anything terrible, or things have gone awry. Everybody’s been reducing their number of therapists, but that’s not surprising either.

I hope the clinical outcomes are not affected. It doesn’t seem to be yet, but we won’t know that either for a little while.

That does seem to be the litmus test, but it’s still a little early to tell.

Yeah. I like borrowers who are concerned about clinical outcomes — some borrowers never speak about it. Operators should be concerned about clinical outcomes. Most of them do, though. Most are in the business to provide good quality care. Or bad things happen to them. It is a little too early to tell, but nobody’s hair is on fire over this.

So if it’s still early on PDPM, what’s going to be driving or motivating financing and transactions — that isn’t related to PDPM?

There are a lot of capital providers, a ton. You have finance companies, banks, and then just other sources of capital. It’s interesting, the banks have gotten — they’re very aggressive on the front end. They’re very aggressive on rates, and they seem to be getting looser on structure, especially covenant structures. Their loan to value (LTV), they’re not really stretching there, so they’re bringing in someone; if they’re lending up to 70% loan-to-value and the borrower wants 80%, that other 5% is coming from someone like a Greystone, or other capital providers. So I think the banks have gotten looser because they’re super aggressive. Everyone has money to deploy. There’s a lot of push to grow assets.

But I think — and I could say this because I came out of the banking sector; I’ve been with four banks in recent years. I think what happens, if there’s a hiccup, if they miss one occupancy projection by one person by one day, or if they miss on their P&L, you’re not going to get 100% on your projections. So a year later, when there’s a review on the back end from credit or portfolio management, they start to downgrade. And then life gets a little tougher for the provider.

That’s been happening for about three years now, from all the banks. It’s great at the beginning when you close the deal, and at the back end, it’s tough.

So I think there’s a slight shift from banking. Then there are the borrowers who want to balance their debt, their capital, and they’re going to place money with HUD. HUD rates are really low right now, and to get a 35-year, fixed-rate loan with no recourse, it just takes a lot of the pressure off the day-to-day minds of our operators or owners or providers.

This interview has been condensed and edited for clarity.

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