PDPM Adjustments Loom Over Skilled Nursing Investors, But Impact Could Be Softer Than Previous Cuts

The federal government sent a shockwave through the post-acute and long-term care landscape earlier this month when it disclosed that the new Medicare payment model for nursing homes had increased total spending by 5% — counter to its goal of budget neutrality.

But while officials mull the ways that the Patient-Driven Payment Model (PDPM) could be nudged back downward, investors in the space are cautiously optimistic that any changes won’t be as drastic as previous cuts.

“We were assuming this would happen,” Kent Eikanas, CEO of Summit Healthcare REIT, told SNN via e-mail.

In a preliminary analysis of changing payment patterns under PDPM, the Centers for Medicare & Medicaid Services (CMS) determined that Medicare doled out $1.7 billion more than it would have under the former structure, for a bump of about 5%.

“As we move forward with programs designed to enhance and restructure our post-acute care payment systems, we believe that payments under the SNF PPS should be established at their intended and most appropriate levels as quickly as possible,” CMS observed.

The agency specifically pointed to the last major payment change in 2011, when an update to the old Resource Utilization Group (RUG) system also generated an unintended increase — which CMS then counteracted with a 12.5% cut.

CMS is currently accepting input from stakeholders about how to proceed with a potential adjustment, floating the idea of a hypothetical 5% cut spread out over several years, or instituted with significant advance notice.

Still, that allusion to the 2011 shift could scare the investors who, since the model was first unveiled in 2018, have been told that PDPM would be a net positive for the industry — primarily due to the potential for cost savings around therapy provision, as well as acceptably modest increases in payments for common services that previously did not generate reimbursements.

But Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), believes that any PDPM changes will be more modest than the fallout from the RUGS-IV shift a decade ago.

“If this 5% turns out to be real, it will likely be phased in over a few years to give operators time to adjust,” Matros said via e-mail. “The approach is quite different than last time, which was the result of a poorly designed system that it was believed operators took advantage of. I don’t believe CMS sees any fault here.”

Matros, like other industry observers, also pointed to the effect of the COVID-19 pandemic on the PDPM math. CMS’s analysis asserted that the increase was independent of any COVID-related payment boosts resulting from coverage waivers, noting that significant changes in therapy provision were observed in the immediate wake of PDPM’s introduction in the fall of 2019.

“Even when removing those using a [public health emergency]-related waiver and those with a COVID-19 diagnosis from our dataset, the observed inadvertent increase in SNF payments since PDPM was implemented is approximately the same,” CMS noted.

Matros disagreed, noting that the 5% increase analysis is still preliminary.

“We saw Medicare revenues increase during the pandemic as a result of skilling in place and providing care to COVID patients,” he said. “We’re past that now. So let’s see what the number is when the industry has finished that analysis and commented.”

Bill Goulding, lead consultant at PACS Consulting, told SNN earlier this week that skilled nursing facilities may have missed substantial numbers of COVID diagnoses during the initial months of the pandemic, when access to testing was spotty. In essence, that means operators were providing more intensive services to COVID-positive patients, but without the proper classification.

“So they’re classified as ‘special care high’ under this new system,” he told SNN. “We saw an enormous spike not only in isolations, for nursing, but in special care high. If they’re only looking at positive COVID diagnoses and hospitalization rates, they’re missing the significant impact of these very sick residents over this past year.”

There’s also the question of just how much investors banked on a permanent boost from PDPM when evaluating deals prior to the pandemic.

“Before COVID hit, we were reviewing a couple opportunities that were expecting a significant lift from PDPM, and we weren’t comfortable with using that increase in EBITDAR,” Eikanas said. “We are of the same mindset and would likely normalize the numbers pre-PDPM.”

For now, uncertainty reigns over the payment landscape for skilled nursing facilities for 2021 and beyond. CMS’s routine proposed Medicare rate increase for nursing homes came in much lower than in previous years at $444 million for fiscal 2022, and the substantial amount of emergency federal CARES Act funding has largely run its course.

“While this is still a net increase on a YoY basis, it falls below expectations, and could be seen as CMS setting the stage to begin to pull back the meaningful amount of aid that has been provided to SNFs during the COVID-19 pandemic,” Mizuho Securities USA managing director Omotayo Okusanya observed in an analyst note.

Those trends come as the landscape looks to adapt to a new normal of low occupancy and muted demand for institutional services, with patients and their families increasingly opting for in-home services for post-acute and long-term care — which a variety of home health companies are aggressively looking to expand.

It’s not just COVID-related fears keeping census down, according to Birchwood Healthcare Partners founder and CEO Isaac Dole: Elective surgeries requiring post-acute care have not yet fully bounced back, he said, while mask-wearing and social isolation helped to reduce the spread of other infectious diseases, such as the flu, that often drive seniors into the hospital and later a SNF.

“Given all of that, a significant acceleration of census growth is likely not going to happen,” Dole said via e-mail.

Current predictions of 1%-per-month gains in occupancy won’t be nearly enough to return the sector to stability, he said, and most operators are currently looking to survive on the patients they have instead of waiting for a gain.

“CMS’s desire for budget neutrality through reimbursement reductions and elimination of waivers such as the three-day stay requirement are all detrimental to our very fragile industry,” Dole said. “To add to the pressure, most of the financial assistance programs, like Medicare advanced payments and payroll tax deferrals, are all set to start getting repaid this year.”