As the nursing home industry continues to be pressured by a broad push for home-based care, labor challenges and a continued decline in reimbursements, concern over the long-term impact of industry recovery has bled into financial opinions on non-clinical service providers.
One such report issued by financial services company Jefferies Financial Group Inc. suggests these issues will continue to affect the SNF industry bottom line, even as near-term headwinds related to the omicron surge begin to dissipate.
A Jan. 21 note published by Jefferies to shareholders concerning Healthcare Services Group Inc. (Nasdaq: HCSG), a dietary, housekeeping and laundry services provider to nursing homes makes such broader statements about the skilled nursing industry as they relate to HCSG. Jefferies analyst Brian Tanquilut and Jack Slevin, CFA and equity associate for Jefferies, were referenced on the note.
A deeper problem, going beyond COVID, lies in health care delivery being “structurally biased” toward home-based settings, Jefferies analysts noted. This bias, baked into the health care system, negatively affects SNF occupancy volumes and in turn, growth for services that cater to the SNF industry like HCSG.
Government and managed care payors are shifting as much patient volume as possible out of nursing homes and into home care, the analysts explained. There’s also a growing adoption of value-based payment models like affordable care networks (ACOs), direct contracting, bundled payments and Medicare Advantage (MA) from these entities.
“Payor pressure, evidenced by declining [revenue per patient day, RPPD] also exacerbates the top-line challenges faced by the nursing homes, which trickles down to HCSG,” the note states.
Occupancy will likely take multiple years to reach pre-pandemic levels as positive occupancy trends “deteriorate,” Jefferies analysts said, referring to a 10 percentage point drop from early 2020 to October 2021.
“The continued tight labor market, particularly for the lower-skilled healthcare employees HCSG recruits, will translate into sustained margin pressure over the coming quarters,” Jefferies analysts said.
During HCSG’s third financial quarter earnings call, management pointed to a lack of near-term margin trend visibility as the company raised employee salaries to compete amid the pervasive staffing crisis, the Jefferies authors noted.
Investors have pulled back and will closely monitor “accelerating wage pressure” and food inflation, a core concern for a business providing dietary services to facilities.
“Labor challenges will persist for a while, particularly as SNFs are unable to meaningfully raise wages, given long-standing pressures on their operating economics,” the analysts wrote. The industry is currently at “peak labor shortage,” Tanquilut and Slevin added.
Much like publicly traded operators, HCSG faces a difficult operating environment that affects its earnings growth, stock performance and investor sentiment, the analysts wrote.
Perhaps the best example of an operator facing investor criticism and lackluster stock performance was Genesis HealthCare, which delisted from the NYSE in March 2021 – the operator stood as one of the last remaining public monoliths in skilled nursing.
Jefferies expects this environment to continue into 2022.
Companies featured in this article:
Healthcare Services Group, Jefferies, Jefferies Financial Group Inc.
