With ‘Mask’ of Federal Support Dropped, SNF Financial Troubles Will Soon Become Apparent

Skilled nursing leadership believes the sector won’t be receiving any more significant funding support from the federal government moving ahead, despite a dragging occupancy rebound and historic labor shortage.

The SNF market will become increasingly more financially stressed as operators struggle to pay back Medicare advances and payroll tax deferrals as well, according to Brian Beckwith, CEO of Arcus Healthcare Partners.

Beckwith participated in the National Investment Center for Seniors Housing & Care (NIC) leadership huddle on the state of the skilled nursing and seniors housing market on Wednesday; Craig Hanson, CEO of Omega Senior Living, participated in the huddle alongside Beckwith and moderator Beth Mace, NIC’s chief economist.

Omega manages skilled nursing properties, along with assisted living, independent living, memory care and continuing care retirement communities (CCRCs) across five states. Private investment management firm Arcus formed in March 2021, and Beckwith previously was CEO of Formation Capital.

The unlikely replenishment of federal support makes existing pandemic assistance that much more critical for SNF operators, including waivers attached to the public health emergency (PHE), Hanson said.

Beckwith concurred, noting that extending the PHE by 90 days would enable the continuation of Medicaid add-ons and waiver of the 3-day stay requirement.

“Those two things can certainly help bridge this gap without putting more direct money into the system,” he said.

The American Health Care Association on the same day added its name to a letter urging Health and Human Services (HHS) Secretary Xavier Becerra to extend the PHE, which is currently set to expire on July 15.

Adaptability amid growing pressures

Looking back at the last two years of the pandemic, Beckwith and Hansonsaid without federal dollars, the industry would have “collapsed” under the weight of labor costs, the higher cost of care that comes with more acuity, and the mad scramble for personal protective equipment (PPE).

Beckwith believes skilled nursing occupancy would have had a more rapid rebound if it wasn’t for the omicron variant in December and January wreaking havoc on staffing levels.

SNF occupancy in the sector is still down about 9% compared to pre-pandemic data, Mace said. During the first quarter of 2020, occupancy was 86.6% and dipped about 12% in January 2021 to 74.1%, according to NIC MAP Vision data.

“Every one of the operators, skilled or assisted, was having staffing shortages, and it was mostly due to folks being out for Covid. That had a significant impact on stalling whatever recovery we were feeling — especially in January, normally for skilled nursing a high occupancy growth month.”” said Beckwith.

Coupled with occupancy concerns, the industry is facing sizable regulatory reform from the Biden administration – a federal staffing minimum ratio, greater scrutiny on SNF ownership and “crackdown” on private equity among them.

“What’s announced generally doesn’t make it all the way to fruition,” said Beckwith of the Biden reforms. “There’s a little bit of a wait and see approach that I think we need to take.”

Generally, such reforms are hard to manage and one size certainly doesn’t fit all, Beckwith added. He pointed to states like Florida that are a good example of positive regulatory changes for the industry – the state’s staffing minimum ratio encompasses more direct care staff roles to meet the mandate.

“The skilled nursing world has seen a number of pressures, really from different angles, in my opinion. We’re having to pivot and try to find trending niches to fill in and be innovative,” said Hanson, referring to additional service lines in home health, among others.

The industry has “gotten pretty good” at responding to changes, including regulatory changes, Beckwith added.

Still the resources and financial bandwidth required to prepare for a possible regulatory change can be draining for operators, the SNF leaders said.

“We spend a lot of time trying to be prepared for those scenarios, and a lot of them don’t happen. There’s a lot of time that’s better served with collaboration on the front side,” said Hanson.

It’s a refrain being broadcast by other operators and senior service advocacy groups like AHCA – more collaboration with the industry rather than punitive measures will “serve everybody,” Hanson added.

Federal funding, stressed properties and buyer interest

Beckwith said federal funding provided “floor support” for prospective transactions, and in some cases the lack of that support translates to more stressed properties on the market.

“I think we’ll have a little bit more of these ‘come to Jesus meetings,’ said Beckwith. Additional federal funding “masked a lot of the [financial] problems” in the sector, he added.

Hanson said he’s seen a lot of small, rural operators struggle to keep up with the SNF regulatory environment. Such operator closures could have heavy repercussions on the immediate community, where the facility is the primary employer.

“Some of those little towns that are out there, it could lead to a lot of those little neighborhoods, cities, or towns drying up,” said Hanson.

While the lack of federal funding could create “come to Jesus” moments, the government is also continuing to support the sector in the form of HUD loans for skilled nursing properties. These are considered the “holy grail” of financing in the sector – such loans keep buyers with a lot of capital interested, and will replace the “floor support” provided by federal dollars the last two years.

“You’ve got a low cost of capital,” Beckwith said of HUD loans available to SNF operators. “I think people are still attracted to skilled nursing real estate, because that financing solution is out there.”

And buyer interest is translating to high valuations, which have run to about $91,000 per unit for the past year according to Mace. Pre-pandemic, price per unit was about $75,000.