Policymakers would better serve the nursing home industry if they understood where, and how, capital markets can most effectively support the sector – namely how private funding plays a role in helping support a challenging operating environment.

A deeper understanding of the SNF capital market structure will help legislators develop policies that better align with combating weaknesses in the long-term care system, according to a new report compiled by ATI Advisory and commissioned by the National Investment Center for Seniors Housing & Care (NIC).

Current policy proposals, most of which are in the Biden administration’s reform package, increasingly call for more owner and operator transparency, an increase in Medicaid home-based care and imposing mandatory staffing levels.

Such proposals “fail to address the root cause of problems they are trying to solve,” according to the report.

Public-private partnerships are failing the residents they’re supposed to serve, researchers added – uncoordinated policy decisions have stunted SNF ability to attract needed capital and in turn modernize facilities.

Meanwhile, Medicaid reimbursement rates in many states are insufficient to support care, meaning it’s even more crucial to have access to private capital in order to supplement government reimbursements.

Such combinations were originally created about 50 years ago to help nursing home Medicare and Medicaid beneficiaries access benefits.

Private investment has historically provided funding for construction, while Medicare and Medicaid finance daily operational support, researchers said, but this dynamic hasn’t evolved to “meet the increasing needs of a rapidly aging America,” or meet practical budget constraints.

While SNFs can utilize a variety of debt and equity capital options, the U.S. Department of Housing and Urban Development (HUD) and local commercial lenders are still the primary options, researchers found.

ATI broke down nursing home capital structure options into debt financing sources, with sources including HUD and commercial lenders, and equity financing, which runs the gambit of public and private operating companies, public and private real estate investment trusts (REITs), and private equity.

Senior debt financing sources – like HUD, KeyBank and Truist – have the lowest return profile and highest priority, and a shorter process to close funds.

Junior/hybrid debt can look like high yield bonds, or mezzanine loans, and can start to look “equity-like.” ATI considers Capital Funding Group, Meridian Capital Group and Midcap Financial to be in this group of financiers.

The equity group, which has the highest return hurdles given insolvency risks, include Welltower Inc., Ventas, Formation Capital and The Carlyle Group, according to the report.

Operators partner with certain sources of financing depending on what stage the company is in its lifecycle, researchers said.

Still, HUD’s “longstanding prevalence” in the nursing home industry proves its reliability as a long-term funding source, but that program could better service residents by incentivizing innovation, researchers added.

ATI data found HUD insured more than 2,300 active mortgages in 2019, ballooning from about 800 in 1995; HUD Section 232 guaranteed $4.9 billion in loans in 2021 alone – more than half of this funding was earmarked for nursing homes.

While the first 30 years of the public-private partnership created about 17,000 nursing homes, the industry has had to contend with “two largely uncoordinated” government programs, referring to Medicaid and Medicare. The analysis calls the reimbursement systems dysfunctional and unpredictable.

Private investor “appetite” is closely tied to future cash flow, researchers said, which is subject to reimbursement, among other policy changes and decision making. This reasoning means there is “significant investment risk” that could increase the cost of capital in the industry, according to the ATI analysis.

Across all payers, reimbursement policies have inhibited access to capital that values clinical investment and technological innovation, largely targeting real estate capital – and in turn new builds – instead of investors that would turn an eye toward improvements and innovation, the report noted.

“Government can be part of the solution by encouraging renewed partnerships with the private sector to modernize buildings, boost technology, enact state-of-the-art infection prevention, and support the skilled nursing workforce,” Kurt Read, chair of NIC’s Board of Directors, said in a statement. “The past few decades have shown that the status quo isn’t meeting the needs of the frail, elderly adults who are served by skilled nursing facilities.

The analysis highlighted four ways federal policymakers can improve the industry overall, including support for access to capital, along with incentivizing innovation, embracing transparency-centric quality measures, and of course adopting measures to improve labor supply and retaining the existing labor pool, amid a historic staffing crisis for the industry.

“When the root cause of a problem is bypassed, only the symptoms are treated,” Brian Jurutka, NIC’s president and CEO said in a statement concerning public-private partnerships in the space. “Skilled nursing facilities have well-documented challenges that need to be addressed. Solutions start with aligning incentives of owners and operators to improve facilities and operations, invest in the workforce, and most importantly, innovate to improve resident care and quality of life.”

ATI researchers concluded that well-intentioned policymaking has forced nursing home operators to turn to debt financing and capital investors to fund their businesses.

Capital investors have become an “important lifeline” for nursing homes as industry leaders seek to modernize the industry – without the prerequisite government funding, according to the study. Innovation, improving infrastructure and person-centered care have been difficult to accomplish through reimbursement alone.

“Future public health policy would be wise to leverage the insights and capabilities of experts in the financial sector and use this collaboration to differentiate bad actors from constructive market participants,” researchers said.