The Centers for Medicare & Medicaid Services (CMS) went beyond what was expected in a positive way, nursing home operators say, with the SNF final rule allowing for the Patient-Driven Payment Model (PDPM) cut to be spread out over two years and a 2.7% pay bump for 2023.

Wesley Rogers, president and CEO of Brickyard Healthcare, told Skilled Nursing News that the government agency met operators “more than halfway” with the SNF final rule. Phasing in the PDPM cut over two years was surprising to many in the industry, he added.

“I think that it was a favorable outcome for our industry. CMS actually listened to the comments that were submitted during the open comment period,” Rogers told SNN.

CMS received more than 4,700 comments during the 60-day feedback period on both the proposed cuts and the implementation of a federal staffing standard.

Brickyard leaders have spent a lot of time and effort on government advocacy and participation, according to Rogers, along with other operators in the state, while working closely with the American Health Care Association (AHCA) to ensure messaging was consistent as an industry.

“Advocacy in our industry, especially with the federal agencies, lies with helping them understand the dynamics of our business. It’s more critical at this point in time than it ever has been. We continue to devote a lot of time and resources in those efforts,” Rogers added.

Ignite Medical Resorts CEO and Co-Founder Tim Fields was also appreciative that CMS listened to operator commentary and advocacy groups.

“I’m happy that [CMS was] able to listen because obviously, in today’s day and age to think about cutting reimbursements just seems draconian with everything that’s going on, with staffing, inflation … we need more resources, not less,” Fields said.

A balancing act

Nursing home associations had initial mixed reactions to the final rule. AHCA called the moves “essential,” while LeadingAge pushed back on cuts that come at a time when the industry is already facing high financial and operational hurdles.

Analysts that cover the skilled nursing sector appear to look at CMS’s decision and other headwinds more holistically, with many believing the payment bump will help balance increased labor and operational costs.

Operators are still working with CMS to better align Medicare reimbursement with what’s going on in the rest of the country, Fields told SNN, in terms of inflation and staffing costs.

“CMS has to recognize that and ensure that the facilities have the right reimbursement that mirrors their expenses,” added Fields.

At the state level specifically there have been a lot of programs to increase Medicaid funding across the board, he said, which helps many rural providers and skilled nursing providers that provide longer term care.

“This is one piece of it, having a 2.7% increase, but obviously as we go into fiscal year 2024, I think that we are going to have to do a good job of telling CMS how expenses, inflation and staffing has impacted the care model. Medicaid increases have been going up dramatically – Medicare has not,” Fields said.

CMS indicated in the final rule that it would phase in cuts to 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 calls the cuts a more “cautious approach,” acknowledging the ongoing public health emergency (PHE).

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.

SNF sector support against inflation headwinds

Despite higher labor and material costs, analysts at Stifel expect the payment bump to improve the overall SNF operator environment. Continued occupancy gains will help the sector as well, while the world moves to a “post-Covid normal.”

As operators improve, so too will the real estate investment trusts (REITs) that finance them, according to Stifel. Operators in a better financial position hopefully means less deferrals and rent abatements moving forward.

“At worst, the operating environment will be better than if the preliminary rate decrease became final. This makes the outlook for REIT rent collections for some marginal tenants that much better,” Stifel analysts said in a note published on Sunday.

Analysts made note that other finalized Medicare rates were released just days before – CMS issued hospice, inpatient rehabilitation facility (IRF) and Inpatient Psychiatric Facility (IPF) final rules earlier in the week.

Like the SNF final rule, these updates were also better than expected by about 1%, Stifel analysts said. This likely bodes well for home health, which has yet to see its finalized rule.

Payment bumps will help boost rent coverage, analysts said, and operators will be less likely to request rent relief or deferrals.

“Operators will now be able to deflect some of their rising costs (especially labor) with the increase,” Stifel analysts wrote, expecting positive reactions from publicly-traded REITs in the space.

Analysts with Mizuho echoed such sentiments, calling the final rule a “key step” to helping operators with financial flexibility at this point in the pandemic.

“Medicare can account for 40-50% of an operator’s top line, and higher revenue should help offset still-elevated labor costs,” Mizuho analysts said in a note.

Still, analysts pointed to a looming headwind that industry leaders should note that was again mentioned in the final rule – a federal push toward minimum staffing requirements. CMS said it is continuing to review commentary from SNF stakeholders regarding the minimum staffing ratio.

“The agency anticipates [SNF stakeholder commentary] will be used to help inform future rulemaking within one year on minimum staffing requirements for long-term care facilities,” according to the CMS final rule memo.

Staffing is the part of the expense structure experiencing the most difficulty, thanks to wage increases and personnel shortages, according to Stifel.

Other parts of the announcement to monitor, Mizuho analysts said, involve additional SNF quality measures in future years, overarching principles for measuring equity and health care quality disparities across CMS programs and the inclusion of short-stay measures in a future SNF QRP program year.

In terms of the PDPM adjustment over two years, analysts attribute the change to public feedback. Operator comments regarding the effects of the PHE swayed the agency to avoid a 4.6% cut all at once.