CareTrust: Home Health Diversions Will ‘Recalibrate’ With Time, But Uneven Post-COVID Recovery Lies Ahead

Executives at CareTrust REIT (Nasdaq: CTRE) expect to see hospital referrals to skilled nursing facilities eventually return, with executives arguing that a recent spike in diversions to home health is unlikely to become permanent.

Eventually, the referral destinations for post-acute patients are going to stop coming out so lopsidedly in home health’s favor, according to David Sedgwick, the COO and newly promoted president of the San Clemente, Calif. real estate investment trust (REIT).

“Home health has historically been a very close second to skilled nursing for Medicare post-acute discharges,” he said on the call. “And given the circumstances of COVID, I don’t think anybody’s surprised that home health has bounced back faster than skilled nursing. But I’d say that the narrative around home health permanently taking share from patients from skilled nursing is mistaken.”


Analysts have been closely eyeing data around post-acute referrals as a major indicator of the future of the SNF sector as it emerges from the COVID-19 environment, with questions about whether post-hospital diversions to the home health setting will become a lasting trend. Omega Healthcare Investors (NYSE: OHI), for its part, predicted that hospital discharges would eventually return to the SNF industry, pointing to the lower cost of institutional care and future demand increases driven by demographics.

Sedgwick, for his part, cited a recent conversation with “a fairly large regional home health operator in the Midwest,” caring for about 1,400 lives a day, that has been diverting 30% of all new patients to SNFs because of those patients’ acuity needs.

The fact that in a SNF, a Medicare patient must be seen by a nurse multiple times every day — compared with roughly eight nurse visits for a home health patient over a 60-day period — is also in the sector’s favor, he argued.


“It’s just a very different type of patient. And those patients, well before the pandemic, have already largely been going home if at all they had that ability to do it,” he said. “So we believe that with time, the balance of discharges to skilled nursing and home health will recalibrate.”

CareTrust reported its fourth-quarter and full-year 2020 results on Wednesday, with a net income of $21.06 million, or 22 cents per share, in the quarter, and net income of $80.87 million, or 85 cents per share, for the year. The REIT reported total revenue of $44.14 million for the fourth quarter and total revenue of $178.33 million for the year.

The REIT has 156 SNFs in its portfolio, with 89 of those operated by The Ensign Group (Nasdaq: ENSG), according to the supplemental attached to its 8-K filed with the Securities and Exchange Commission (SEC). In that filing, CareTrust provided a breakdown of tenant lease coverage for the top 10 tenants in its portfolio including and excluding relief funds from the Department of Health and Human Services (HHS).

Source: CareTrust REIT

Ensign, which has returned all of its funds from HHS over the course of 2020, had identical rent coverage for both segments as a result. Priority Management Group, the next largest tenant with CareTrust at 15 facilities, had 1.62x rent EBITDAR [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs] for the year ending September 30, 2020 without HHS funds and 1.79x rent coverage for the same time period including those funds.

Cascadia Healthcare, which has 13 facilities owned by CareTrust, had 1.3x EBITDAR coverage for the year ending September 30, 2020 without HHS funds and 1.57x EBITDAR coverage with the support.

With the COVID-19 emergency extended through the end of the year, the suspension of sequestration, the increase in the Federal Medical Assistance Percentage (FMAP) to state Medicaid rates, and the waiver of the three-night hospital stay requirement for a SNF stay will remain in force for all of 2021 — which CareTrust executives argued will be critical for operators to emerge from the pandemic.

And about $27 billion in stimulus funds remains unallocated, they noted.

“It’s too early to sort of predict the degree of the recovery slope, and when that really starts,” Sedgwick said. “We think that overall, it’s going to be fairly uneven throughout our portfolio and throughout the country as a whole. We’re encouraged to hear anecdotally from our operators that where they’re seeing COVID wane, they’re starting to see an increase in their overall skilled nursing census.”

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