Sabra CEO: Reimbursement Hikes May Be Even Bigger Next Year to Account for Inflation 

Nursing home occupancy continues to slowly improve, a trend that along with higher reimbursement rates going forward, will improve the bottom line for Sabra Healthcare REIT (Nasdaq: SBRA), according to executives.

Rick Matros, CEO of Sabra, said during the company’s second quarter earnings call on Tuesday that he expects a large increase to next year’s Medicare rate, given the fact that it will be the first year without the parity adjustment.

The Centers for Medicare & Medicaid Services (CMS) split a 4.6% parity adjustment between two years to make the Patient Driven Payment Model (PDPM) budget neutral, after spending under the new model was $1.7 billion more than the agency was expecting.

“That goes away next year; that was actually a pretty big hit. It’s a difference between a 4% market basket this year and a 6.4% market basket,” said Matros. “Medicare is a little bit more current on capturing inflation than a lot of the state Medicaid systems.”

Average occupancy for its SNF assets was 74% as of June 30, while seniors housing occupancy came in at 88%, behavioral health at 86% and hospital assets at 77%, according to a supplemental earnings document.

Sabra reported 426 investments with a 34% skilled mix and 67 relationships across all care settings as of Q2.

Reimbursement rate optimism

Next year’s rate is anticipated to be “quite strong,” Matros said, since it needs to capture inflation as well.

Medicare Part A accounts for nearly 25% of revenue for Sabra’s SNF tenants, the Irvine, Calif.-based REIT said in its press release for Q2 earnings.

For Medicaid, there’s usually a lag in cost report systems. Most states will fully capture the highest point of inflation in 2022 in next year’s Medicaid rates.

“Obviously it’s come down since 2022,” noted Matros. “That’s one of the reasons [some Medicaid] rates are so strong for this year, there are a number of states that decided to override the formula, because the formula wasn’t reflecting more current inflation. And so some of those states received better rates.”

Sabra saw favorable Medicaid rate increases in Ohio, Washington and Oregon, with a blended 6% increase, as well as Kentucky with an 8% bump, among other states within its footprint.

Executives for the REIT anticipate increased Medicaid rates will average over 5% across its portfolio.

The Kentucky increase will have a positive effect on Sabra’s largest SNF tenant, Signature Healthcare. Avamere, the REIT’s third largest tenant, will benefit from the blended 6% base rate increase in Oregon and Washington.

Medicaid accounts for nearly half of revenue received by Sabra SNF tenants.

“A newfound awareness on the part of a lot of states [is] that Medicaid has been underfunded,” said Matros. “We anticipate rates being even stronger next year than they are this year. It’s all formulaic.”

Any occupancy gains are a positive

In terms of occupancy gains, Matros said while the increase isn’t happening quickly, occupancy is definitely on the rise..

“Coverages continue to improve broadly, occupancy is increasing in our skilled and [assisted living] portfolios, labor is slowly getting better, all leading to margin improvement in our primary asset classes,” he said.

Talya Nevo-Hacohen, chief investment officer for Sabra, said occupancy and revenue recovery in Canada is stronger than in the U.S. The REIT’s Canadian communities have had “significant growth” in these areas, while assets stateside are still dealing with factors impacting expense growth, particularly labor.

Sabra reported $18 million in gross proceeds from the disposition of four SNFs during Q2, with funds from operations (FFO) at 32 cents per diluted common share.

The portfolio that created a drag on near-term earnings while increasing net debt to adjusted EBITDARM ratio was one formerly operated by North American and transitioned to the Ensign Group (Nasdaq: ENSG) and Avamere, Sabra CFO Michael Costa said during the earnings call.

In other restructuring, Sabra transitioned 11 senior housing properties formerly managed by Enlivant, to be run by existing Sabra operator Inspirit Senior Living.

EBITDARM for skilled nursing and transitional care was 1.65x, including provider relief funds.

As of June 30, Sabra reported $926.7 million in liquidity, consisting of unrestricted cash and cash equivalents of $27.2 million, and available borrowings of $899.5 million under its revolving credit facility. The REIT also had $500 million available under the ATM program.

Sabra continues to invest in its behavioral health portfolio for rural communities, Nevo-Hacohen said, through the conversion of existing properties owned by Sabra.

“This is a granular process and takes time,” she added. “At the end of the second quarter Sabra’s investment in behavioral health included 17 properties and two mortgages with a total investment of just over $800 million.”

As for a potential minimum staffing mandate, Matros said he sees the delay in the minimum staffing mandate to be a positive development for the industry – sentiments shared by other skilled nursing leaders.

“CMS is really listening to all the concerns the industry has, and the need to give the industry time to recover more,” said Matros.

He expects the mandate to be phased in over time, and that the beginning of that phase-in won’t start for “some period of time.”