Nursing home operators can expect a long comment period once the federal minimum staffing mandate comes out, potentially drawing out into the following year before anything is finalized.
Barry Port, CEO of the Ensign Group (Nasdaq: ENSG), said during the company’s second quarter conference call on Friday, that this is the tiniest bit of clarity the industry has at the moment on a potential minimum staffing mandate – and even that could change. San Juan Capistrano, Calif.-based Ensign has in the meantime been visiting D.C. at policymakers’ requests, providing comments and feedback on the coming rule.
“We don’t think [the potential staffing mandate] will be out for another month or so,” Port said. “We’re not reacting much to what we don’t know. What we have been focused on is making sure that we continue to be the best employer we can be.”
For staffing improvements, Ensign leadership has been focused on ensuring that retention efforts are “exceptional,” he said, and the company is sharing best practices on how to improve culture, hoping that these efforts make Ensign facilities the first choice for health care workers.
As newly acquired facilities adopt Ensign’s culture and best practices, including empowering local leadership teams per market, turnover has decreased along with agency staff usage, said Port. Staffing agency use in particular has decreased six months in a row as of June 30.
Despite minimal updates on the federal staffing rule, Ensign leadership was happy to see state Medicaid rate increases for key states like Texas, and the expected Medicare rate increase by 3.5% to 3.7%.
“The combination of a positive rate environment and a slowing of inflation in some of our biggest costs, including labor, will add to the operational momentum we continue to generate as we focus relentlessly on fundamentals,” said Suzanne Snapper, CFO for Ensign.
Still, performance could be impacted by variation and reimbursement system delays, and changes in state budgets, Snapper noted. The return of seasonality in occupancy and skilled mix, the impact of census and staffing, and short term impact of acquisition activities will play a role as well.
Minimum staffing mandate and M&A
Within the context of mergers and acquisitions, some sellers and brokers are putting minimum staffing into pro forma calculations, said Chad Keetch, chief investment officer for Ensign. Other sellers, added Port, are ignoring any potentiality, any factors that may have some sort of headwind effect on pricing.
“All that said, I certainly think that will create some disruption in the market that will generate an enormous amount of opportunity for us,” said Keetch. “You know, our strategy will remain the same, which is to pay prices that are reflective of reality.”
Ensign reported total skilled services revenue for the second quarter of $884.2 million, a 25.9% increase from the second quarter in 2022. Total skilled services income was $117 million, a 14.4% increase compared to the second quarter of last year.
Executives noted the company’s managed care growth as well – with census for this population increasing by 8.2% for the quarter, and managed care revenue increasing by 12.2%.
“We continue to build stronger relationships with our managed care partners, due to the better coordination of care, increased capabilities and strong clinical outcomes,” said Port.
Revenue for Ensign’s REIT, Standard Bearer, was $19.9 million for the second quarter. That’s an increase of 13.2% compared to the same quarter in 2022. Funds from operations for the REIT was $13.3 million, a 10.1% increase from the second quarter last year.
Standard Bearer comprises 103 properties, leased to 75 affiliated skilled nursing and senior living operators, and 29 leased to the Pennant Group.
Ensign posted GAAP diluted earnings per share for the quarter of $1.12, a 10.9% increase over the prior year’s second quarter. Moreover, GAAP net income was $64 million for the second quarter.
2Q Quiet for M&A, But Action Expected in Coming Weeks
In terms of deal making, Ensign spent the quarter working with new teams in its cluster model. The company added 45 new operations to its portfolio in the last 12 months, 19 of them in the previous quarter alone.
Ensign’s portfolio currently consists of 290 health care operations across 13 states, 26 of which also include senior living. The company owns 108 real estate assets, 79 of which it also operates.
“We may never have seen as much potential to drive organic growth across a portfolio than we do right now,” said Port. “There are so many opportunities in front of us to improve labor and drive occupancy and skilled mix.”
Port expects some of Ensign’s latest acquisitions to still face transitional growth during occupancy pressures typical of summer months. Executives said they “can’t wait” to see how these operations contribute to results as they mature.
Some acquisitions are contributing “ahead of schedule,” Keetch said, with occupancy and skilled mix days at 77.2% and 28%, respectively. However, compared to same store occupancy and skilled mix days of 78.5% and 32.3%, there is room for growth, he said.
“We’ve been pleased to see the quicker-than-average contributions that some of our recent acquisitions are making clinically and financially,” said Ensign COO Spencer Burton.
Fairmont Rehabilitation Hospital in Lodi, Calif. was an example of this, he said, with a meaningful earnings contribution and no staffing agency use. Fairmont in the last five months maintained a five-star rating and grew revenues, occupancy and skilled mix.
Ensign expects more deals in the “very near future,” Keetch noted, with one announcement in the coming weeks.
The past few years have been very difficult for SNF operators as evidenced by low occupancy and high utilization of staffing agencies, along with the poor clinical and financial health of recently acquired facilities, he said. As a result, lots of opportunities are on the way, including in new states, but the highest priority will always be with the growth of Ensign’s existing footprint.
“As we carefully select our acquisition targets, we prioritize those that give us exposure to new markets and states we already operate in, or then enhance our service offerings and markets we’ve been in for years,” said Keetch.
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