SNFs Seen Facing Higher Labor Costs, Uncertain Interest Rates Among Other Macroeconomic Pressures

Labor costs and interest rates, among other macroeconomic factors, continue to affect the nursing home industry as use of temporary staff and AI also appear to be exerting an influence.

That’s according to CliftonLarsonAllen’s (CLA) economic outlook for 2023, which outlined industry priorities for the next couple of years. Containing labor costs in part by using digital solutions, recruiting talent, selling excess inventory, diversifying the customer base, and pursuing succession planning are among practices providers may partake in looking ahead.

“There are a lot of companies that may not be considered a technology company, but they are heavily using these types of digital resources, robotics, all sorts of key software, and applications that are helping them operate more profitably,” said Clayton Bland, chief wealth advisory officer for CLA.

AI’s growing footprint in the skilled nursing industry extends from clinical to back office and marketing services, and allows for more opportunities to save on costs. ChatGPT, as one example, is used in the space for customer service interactions, content generation, language translation and code generation – enhancing customer experience and sales efforts.

Nursing home providers are dealing with higher prices across the board due to inflationary pressures. CLA research, based on provider input from January, revealed that workforce costs surged by as much as 30% in 2022. And, food, beverage, equipment and supply prices, and insurance costs, increased between 5% and 15%.

But recent quarterly earnings reports from the nursing home industry show that economic pressures might be easing.

The Ensign Group (Nasdaq: ENSG) in its second quarter earnings call last month said the combination of a positive rate environment – Medicaid rebasing specifically – and slowed inflation in some of its biggest costs including labor will add to operational momentum for the rest of the year.

The return of seasonality in occupancy may impact performance, Ensign leaders added.

Meanwhile, Omega Healthcare Investors’ (NYSE: OHI) robust financial results for the second quarter rested on better occupancy levels, higher state reimbursements and improvements in the labor market even though use of agency workers still remains high.

CLA briefly touched on policy initiatives during their 2023 outlook as well, in terms of when operators might see movement on certain pieces of legislation.

Congress is in recess from July 29 to Sept. 5, meaning anything currently being reviewed by a committee will stay there until the fall.

For operators, that likely means no movement on crucial proposals including the staffing minimum mandate, which is currently being reviewed by the Office of Management and Budget (OMB). OMB works closely with congressional offices, among other legislative bodies, to inform its decisions.

In terms of interest rates, CLA Managing Principal for Investments Chris Dhanraj said SNF leaders must be prepared for higher rates for a longer period of time.

“The market is forecasting that the Federal Reserve will turn around and start cutting interest rates … seven interest rate cuts in the next few years,” said Dhanraj. “We think that’s overblown.”

Just this March, the Fed decided to raise interest rates again by 25 basis points, a move analysts thought at the time would slow dealmaking and affect refinancing. Nursing home operators facing maturing loans still face costly refinancing, placing more stress on cash flow.

There was a lot of stimulus introduced during the height of Covid that is still out there, Dhanraj noted, even as the Fed continues to wind down its balance sheet.

“The Federal Reserve continues to wind down this balance sheet, [and] we expect that to go down, you know, to $6 or $7 trillion in the next couple years,” said Dhanraj. “We have had tremendous amounts of fiscal spending certainly through Covid and even afterwards with the Inflation Reduction Act. There is an appetite to increase spending on both sides of the aisle – both Democrats and Republicans.”