Hager: ‘Astonishing’ Expense Increases, Occupancy Drops in Northeast Hotspots Battered Genesis

The future of one of the largest skilled nursing operators in the U.S. is deeply uncertain because of the COVID-19 pandemic, and that uncertainty extends to the actual effects of the emergency — which in one state could be crippling and in another, barely noticeable depending on the extent of the disease spread.

For the Kennett Square, Pa.-based Genesis Healthcare (NYSE: GEN), the pandemic has raised “substantial doubt” about whether it can survive the next 12 months, as the company disclosed in releasing its second-quarter earnings.

The operator, which has 338 SNFs and 23 assisted living facilities as of the second quarter, reported a net loss attributable to the company of $22.01 million, or 20 cents per share, compared with a net loss of $4.82 million, or five cents per share, in the year-ago period.

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As a result of the pandemic, incremental expenses and lost revenue came to about $213 million in the second quarter alone, Genesis CEO George Hager emphasized on the operator’s earnings conference call on Tuesday.

And while the $228 million that Genesis received from various state and federal relief programs helped to offset those costs to keep it in compliance with its financial covenants, as Genesis chief financial officer Tom DiVittorio noted on the company’s earnings call, the challenges of COVID-19 will continue to put significant financial strain on the company.

“Financially speaking, the key performance drivers in this business have always been and will continue to be overall occupancy levels and the ability to effectively control labor costs,” Hager said on the call. “Even a 1% change in occupancy or labor costs in this business is a big deal. All other drivers, quite frankly, pale in comparison.”

Among those drivers of occupancy and labor costs, Genesis as a whole saw far greater shifts than 1%: Same-store occupancy fell 11% in the second quarter from the first quarter, while the weighted average wage rate for all of Genesis’ nurses — registered nurses (RNs), licensed practical nurses (LPNs) and certified nursing assistants (CNAS) — rose 29% over the 2019 second quarter.

Hager noted that nursing staff account for 50% of Genesis’ entire labor force.

Occupancy, though it sat at 77% in the second quarter, hit a low in June at 74.2% and seems to be recovering somewhat through July and August as more Genesis facilities come out of self-imposed admission restrictions, DiVittorio said.

More than 140 facilities implemented on admissions hold simultaneously in May at the highest point of the coronavirus impact on Genesis, he said, and 217 facilities had admission restrictions for some period.

“By the end of June, there were only 41 facilities on admission hold and there are currently just 31 facilities with these restrictions,” DiVittorio said on the earnings call.

In New Jersey, Massachusetts, Connecticut, Pennsylvania, and Maryland, where Genesis operates almost half of its beds, the situation was even more dire. Occupancy in those five states in the second quarter fell 17%, more than twice the drop of 8% in all other states. In Connecticut alone, Genesis’ occupancy fell 23%.

Labor costs in those states were similarly dire. The weighted average nursing cost per hour in the second quarter of 2020 rose 45% over the year-ago period; in New Jersey, which was the hardest-hit state in Genesis’ portfolio, the cost rose 63%, Hager said.

“These are astonishing figures that highlight just how wide the range of impact can be on SNFs located in markets having high prevalence of community spread, compared to those with low or moderate community spread,” he said on the call. “Which brings me back to the issue of adequate and timely funding support.”

Hager had praise for the government’s move to “swiftly and decisively” to get funds out to providers as quickly as possible, but he argued that the plan came with a downside: Money ended up being sent to SNFs regardless of how severe their COVID-19 situation was.

“A consequence of this approach is that some providers received more funds than they need, and others received significantly less than they need,” Hager said. “Because of our geographic density in hard-hit markets early in the pandemic, and the resulting disproportionate impact to our occupancy and operating costs, coupled with what appears to be a slower and more complex recovery than initially hoped for, Genesis and many others in the industry need timely and government-sponsored financial support, which is essential to meeting our responsibilities to residents, patients, employees and all other stakeholders.”

Reimbursement did grow across all payer types, DiVittorio noted, with weighted average rate growth of 11% to reflect higher patient acuity and COVID-19-specific supplemental funding provided by many state Medicaid programs.

Genesis recognized $40 million in additional COVID-19 state funding in the second quarter, with $46 million year-to-date.

The operator also has “commitments for an additional $10 million of supplemental state funding, and we remain optimistic that additional funding will be appropriated over the next few months,” DiVittorio said.