As the nursing home industry continues to work its way through ongoing workforce and occupancy challenges, one of the nation’s largest owners of skilled nursing facilities is keeping a close eye on how states are extending or making permanent the Medicaid funding boosts tied to the Covid-19 public health emergency (PHE).

The Omega Healthcare Investors (NYSE: OHI) leadership team highlighted a number of states, including Florida and Pennsylvania, that have already announced significant increased Medicaid rates that reflect the need to fund higher costs, while also balancing the desire for additional regulatory requirements. 

Other states have also opted to continue to provide Covid-related federal medical assistance percentage (FMAP) rate increases after the PHE expires, either on a permanent or phase-out basis.

These types of “balanced state actions” are what Omega Senior Vice President of Operations Megan Krull hopes the federal government keeps front of mind when proposing future mandates — such as a federal staffing requirement.

“Given that the long-term care industry is still deeply entrenched in the recovery phase of this pandemic, we hope that the federal government takes note of some of these more balanced state actions and sees clear to provide funding for any mandates that it may impose,” Krull said Tuesday during the company’s Q2 2022 earnings call.

In spite of the continued uncertainties and near-term headwinds, CEO Taylor Pickett remains optimistic about the long-term future of the skilled nursing industry.

Revenue for the second quarter for Omega was approximately $245 million compared to $257 million for the second quarter of 2021 as the year-over-year decrease was attributed to asset sales and operator restructuring.

The real estate investment trust’s (REIT) adjusted funds from operations (FFO) of $0.76 per common share beat consensus estimates by $0.06, and Omega shares were up 0.61% at the close of regular trading on Thursday.

As of June 30, Omega had an operating asset portfolio of 939 facilities with approximately 92,000 operating beds.

Slow growing occupancy, staffing improvements

After seeing consistently slow occupancy growth over the course of 2021 for Omega’s core portfolio, census took a dip from 75.8% in December to 74.6% to start off 2022 — largely due to the omicron variant surge.

Omega is starting to see that number tick back up again, reporting occupancy as high as 77.7% as of mid-July, according to preliminary results.

More specifically, 27% of Omega’s facilities have fully recovered, and an additional 21% have recovered within 5% of pre-Covid levels.

Pickett also noted improvement in staffing availability. He did, however, caution that the wage for full-time staff remains significantly higher than pre-pandemic levels, something he sees as a “permanent shift” for operators.

Agency expense on a per-patient-day basis for Omega’s operators is still 6x higher compared to 2019, according to Krull.

Another factor that continues to impact staffing is the continued spread of Covid-19. While clinical outcomes are much improved from where they have been, any strain on an already challenging staffing situation has the potential to delay recovery, she added.

Omega’s operators are continuing to offer wage increases and pursue other strategies to both hire and retain staff, according to Kroll, even seeing some success in bringing nurses in from overseas.

Rent deferrals and restructurings

While Omega continues to navigate challenges surrounding operator restructuring, some progress has been made.

On April 8, Omega entered into a restructuring agreement with Guardian Healthcare where, as part of the plan, the REIT sold 12 facilities and released eight facilities. At that point in time, Guardian resumed making rent and interest payments, according to COO Dan Booth.

Omega has also completed all of the restruing work related to Gulf Coast Health Care. Back in May, the REIT sold the majority of its facilities for more than $300 million.

The real estate investment trust (REIT) sold 22 previously leased and operated Gulf Coast facilities for $318 million in cash, according to a news release. The net cash proceeds, including related costs, were $304 million — amounting to a net gain of approximately $113.5 million.

Discussions surrounding a restructuring agreement with Agemo Holdings, which represents approximately 6% of contractual rent, are ongoing, according to Booth. The plan is expected to involve the sale of a “material portion” of Agemo facilities within the Omega portfolio.

Two other unnamed operators were also unable to make rent payments in Q2 and in the month of July.

Industry analysts noted that Omega having “a few more tenants paying rent and a few less not paying” can likely be attributed to the improving environment of the sector overall.

“Headwinds remain, including COVID’s effects on occupancy and high costs (especially labor). But occupancy is increasing and should improve further (assuming no COVID relapse) and labor costs appear to be increasing at a slower rate,” Stifel analysts wrote in a note published on Monday.

While it’s not yet categorized as “good”, according to Stifel, analysts expect the CMS final SNF rule to help the situation.

Medicare cuts come at the wrong time

Just days after the Centers for Medicare & Medicaid Services (CMS) released its final SNF rule, Krull, while recognizing the improvement from what was initially proposed, expressed disappointment in the final outcome.

“So obviously, it was great that they phased in that cut, but we would have liked to have seen that not picked in at all this time around given the environment,” she said.

CMS indicated in its final rule that it would phase in cuts to the Patient Driven Payment Model (PDPM) over two years, resulting in a 2.3% cut, or $780 million reduction in 2023 and another 2.3% reduction in 2024.

The agency in its proposed rule originally planned to adjust SNF payment rates by 4.6%, or $1.7 billion over the course of one year, to achieve budget neutrality.

CMS had previously determined that PDPM caused an unintended increase in payments by about 5% per year since its implementation in October 2019.

Overall, the SNF final rule gives facilities a 2.7% bump to their payments for 2023. This reflects a $1.7 billion increase resulting from a 5.1% bump to the payment rates for SNFs. That includes a 3.9% SNF market basket increase, a 1.5 percentage point market basket forecast error adjustment and less than a 0.3 percentage point productivity adjustment.