Skilled Nursing Distress Looms as CARES Funding Ebbs: ‘Bills Are Starting to Come Due’

Billions of federal stimulus dollars have kept the skilled nursing sector afloat during the COVID-19 pandemic, but as the most recent distributions hit operators’ bank accounts, storm clouds are still gathering in the distance.

While nursing home operators may have been spared the immediate financial woes that hit businesses in a variety of other sectors, signs of distress in the health care sector spiked significantly in the second quarter of 2020, according to a new analysis from law firm Polsinelli — with more uncertainty ahead as the federal largesse has largely run its course.

“They were given a lifeline through this process, through this pandemic — the initial stages — but I think what’s going to be really interesting is what happens over the next several quarters, because those bills are starting to come due, and folks are going to be applying for forgiveness,” Polsinelli shareholder Jeremy Johnson said. “I think it’s just getting started on the senior care side of things, frankly.”


For post-acute and long-term care operators, that lifeline consisted largely of distributions from the $2 trillion CARES Act relief package passed early in the pandemic. The Department of Health and Human Services (HHS) has released several tranches of aid, including a total of almost $10 billion in funds specifically for nursing home operators, as well as billions more based on past Medicare and Medicaid reimbursements.

HHS just last week sent a total of $2.5 billion directly to nursing home operators to cover testing and other COVID-related expenses; the feds will send out an additional $2.5 billion in aid over the coming months under a value-based purchasing arrangement that will reward facilities for reducing the numbers of new infections.

Outside of the direct CARES Act grants, operators have been able to access forgivable loans through the Paycheck Protection Program (PPP), and advance Medicare reimbursements that eventually must be repaid.


Judging by the public disclosures of nursing home operators and their landlords, those massive federal disbursements achieved their goals in the short term: None of the major real estate investment trusts (REITs) reported having to provide any substantive rent relief during the most recent round of earnings releases, and leading operator The Ensign Group (Nasdaq: ENSG) was even able to return all $110 million in CARES Act relief amid a quarter of record earnings.

Publicly traded nursing home giant Genesis HealthCare (NYSE: GEN) was one of the major exceptions, citing the benefits of the federal relief but also indicating that its future remains in serious doubt regardless of whether further support from Washington comes through.

“Even if the Company receives additional funding support from government sources and/or is able to execute successfully all of its these plans and initiatives, given the current challenging environment the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued, which could force the Company to seek reorganization under the U.S. Bankruptcy Code,” Genesis warned last month.

And the future of federal dollars is similarly cloudy. Congress recessed last month without a vote on the competing stimulus packages offered up by Democrats and Republicans, with both sides reportedly far apart on a variety of issues — including liability protections for health care providers and other businesses.

Against that backdrop, Polsinelli increased its Health Care Services Distress Index to 510 during the second quarter of this year, up 276 points from the first three months of 2020 — and only slightly below the record high of 550 in the fourth quarter of 2018.

Source: Polsinelli

The index is largely based on the volume of Chapter 11 bankruptcy filings for companies worth $1 million or more, and while the increase was significant, Johnson noted that much of the recent action came from non-senior care firms such as hospital operator Quorum Health and the parent company of substance abuse care provider American Addiction Centers.

“There weren’t a lot of skilled nursing bankruptcy filings or CCRC [continuing care retirement community] filings in the past three months — I’m not sure that were any, actually, in the last quarter anyway,” Johnson said. “But they are routinely a feature, and we represent a lot of those kinds of companies in bankruptcy and outside of bankruptcy. So I think they’ve been sort of kept alive.”

But even with the support, operators other than Genesis have expressed grave concerns about their ability to survive once the stimulus dries up. About 40% of providers indicated that they could not sustain their current operations for more than six months at current expense rates, a recent poll by the American Health Care Association found; more than 70% said they may not survive the next year.

Those elevated COVID costs are unlikely to abate anytime soon, with new federal regulations requiring tests of nursing home staff up to twice weekly depending on community infection rates, and personal protective equipment (PPE) shortages still affecting providers across the country.

About $2.5 billion of the most recent round of CARES Act funding is specifically dedicated to covering the cost of testing and other direct COVID expenses, and HHS is providing most nursing homes with a free point-of-care testing unit along with an initial round of test kits.

But operators will be on the hook for the cost of subsequent assays, and some providers have cited concerns about those ongoing expenses. A separate survey from trade group LeadingAge found that only about a quarter of facilities were actively using the government’s point-of-care devices as of August, with more than half of those who had not yet begun saying they’d feel more comfortable if they could receive refills easily and affordably.

With Congress not set to reconvene until after Labor Day, and as the pandemic drags on longer than even the most pessimistic prognosticators thought back in March, the breaking point for many providers could come sooner than later.

“I think the money is running out, or has run out, and now folks have to reckon with what their financial condition is now, what their financial is,” Johnson said.

Chuck Sudo contributed reporting to this story.

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