As the skilled nursing industry heads toward a new year with continued labor shortages and reimbursement gaps, service repositioning and closures among operators are expected trends for the space.
And although there are signs of positivity in the form of increased Medicaid reimbursement in some states, extensive rural closures are creating “nursing home deserts” and up to 450,000 nursing home residents are still at risk of displacement without a sufficient workforce.
Repositioning and closures were a topic of discussion at Health Dimensions Group’s (HDG) webinar on Tuesday, with experts also touching upon how hospitals are increasingly seeing their nursing home assets as financially nonviable.
At some point, hospitals may decide to divest of their nursing homes, said John Capasso, executive advisor for senior care with HDG. It’s a trend Skilled Nursing News has seen before.
Dealmaking for nursing homes and seniors housing alike have been down this year in a strained capital market, Branin said, as the Federal Reserve raised rates continuously since March 2022 in an effort to curb inflation.
Meanwhile, slow occupancy recovery, increased operating costs and challenging labor markets have left the post-acute care space as a “less desirable commodity,” he said.
Closures and repositioning
HDG used statistics from the American Health Care Association (AHCA) to drive home closure concerns, with 579 faciltiies shuttering nationwide since 2020, often due to financial viability problems. What’s more, 38% of pandemic-era closures affected high-performing facilities, or those with a 4- or 5-star ratings based on the Five Star Rating System.
“Historically, closures have been viewed as the unfortunate result of sustained delivery of poor care [but] it’s not just the poor performers who are closing now,” said Paul Branin, vice president of business development at HDG.
One of the biggest SNF market shifts, he noted, was operators taking on and getting comfortable with more risk. A possible way to meet this market shift would be for SNF operators to know their market and have a good understanding of what they do best when it comes to specialty services.
“We’re no longer in the industry of hips and knees. Now it’s comorbidities and complications,” Branin said. “There are opportunities for specialized care. Whether they be bariatric residents, [chronic obstructive pulmonary disease] or [congestive heart failure] residents, understanding where you are in your market can help you establish your brand.”
Hospital-owned nursing homes
Another trend noted by experts was that skilled nursing facilities owned by acute care systems struggled to remain viable. This was because such facilities faced substantial negative Medicare margins, said Capasso.
SNFs owned by hospitals saw a negative 68% Medicare margin in 2019, followed by negative 50% in 2020 and negative 40% in 2021, according to data collected by MedPAC.
As such, many hospitals view nursing homes as money-losing endeavors, Capasso noted. Medicaid and Medicare Fee-for-Service, or traditional Medicare, reimburse hospitals at rates lower than the hospital’s expenses.
A fundamental misunderstanding involves different payer sources between the two care settings, he said, with Medicare and Medicaid being among the worst payers for hospitals and commercial payers having the highest reimbursement.
“Converse to that, Medicare payers are, as we know, the best payers for the nursing home. So a fundamental misunderstanding of the payer structure can really be a fundamental challenge for many hospitals,” said Capasso.
Other contributing factors to hospital-owned SNF viability involve administrative expenses exceeding nursing home revenue, he said, and nursing homes usually not having the level of revenue to support capital allocations.
“Unfortunately, capital that is invested in nursing homes, which typically is in the form of renovations and increasing curb appeal, does not have a return on investment,” said Capasso. “In fact, it’s got a negative return on investment because it doesn’t generate additional revenue.”
Ancillary services provided in a hospital-owned nursing home also are usually provided by the hospital system – a much more expensive option due to outsourcing of such services.
Moving forward, hospitals must reevaluate how much capital they need to allocate to their nursing homes, and how much towards incentives for their workers, he said.
HDG has at times seen benefits, as a percentage of wages for nursing home employees, to be in the 20% to 25% range. “At nursing home levels of revenue, that can be very, very difficult to accommodate,” added Capasso.
SNFs and the capital market
Until capital markets and dealmaking improve, internal growth through value-add propositions might mean bringing on a third party provider for recruitment or community leadership positions, Branin said.
Improving marketability of an asset with landscaping can improve first impressions and overall resident satisfaction, he added.
Adjusting to market needs is especially critical considering the labor shortage, he continued. Having third parties improve efficiencies is another way to meet the moment, maybe having a separate entity help with Minimum Data Set (MDS) or revenue cycle management.
“Overall, this is a difficult environment for skilled nursing operators. But this is also an opportunity to improve and stabilize operations through efficiencies,” said Branin.
In terms of the capital market environment and the skilled nursing industry, Branin said that while the industry is needed, and there’s increasing demand, a glaring need for replacement and new development means there’s no longer the same level of attraction from capital.
It’s a good time to look at existing operations, maybe focusing on a resident assessment system – SNFs could undergo a market study to understand where they are aligned in their respective markets and where they want to be in future.
A regional alignment team can provide growth opportunities, he said, if you have the right person in the right seat.