While many industry leaders vociferously condemned the finalized federal staffing requirements for nursing homes that were released on Monday, analysts covering publicly traded companies in the sector were relatively circumspect.

They see the requirements as posing a risk, but analysts who communicated with Skilled Nursing News also generally remained upbeat about the longer-term prospects for the industry – and emphasized the battle still to be waged before the rule is slated to take effect. The staffing minimums are slated to be in place within three years, or five years for rural facilities. Certain exemptions also are available, depending on the availability of staff in a given market.

Vikram Malhotra, senior analyst at Mizuho, warned that the mandate could reduce an operator’s rent coverage.

“All else being equal, with no more occupancy gains, no more rent growth, and no other expense cuts, if this were to be passed in a vacuum and had to be adhered to in the next year, there would be a hit of 30 basis points to rent coverage,” he said. “So, I think we definitely need additional sources of labor to meet this requirement.”

Skilled nursing operators will require support at both federal and state levels, coming in the form of funding or extended timelines to comply with the mandate. Given the industry’s gradual recovery from COVID-19 lows and slowly improving fundamentals, such support will be necessary to ensure the sustainability of skilled nursing operations, he said.

“There would obviously be a need to hire [new staff] over three years, but the cost for an operator would go up,” he said.

Raymond James Equity Research Analyst Jonathan Hughes emphasized that the ultimate fate of the rule remains uncertain.

“Implementation of the staffing mandate would take years, and would likely be challenged in the courts and could be watered down, or scrapped altogether,” Hughes told SNN in an email. “We’ve written this before, but we believe the final rule and impact will be manageable, and the SNF REITs continue to offer attractive long-term supply/demand dynamics, a mix of value, growth, and income, and are also contrarian, uncrowded names, unlike others in the health care REIT sector.”

Investors seemed largely unconcerned on Monday, with shares generally holding steady for publicly traded skilled nursing operators and REITs with SNF assets. While the minimum staffing rule is “slightly worse than expected,” BMO Capital Markets Analysts Juan Sanabria and John Kim remain bullish on the sector in the longer term – and they too are optimistic about the rule being further modified.

“We remain positive on SNFs, still expecting an eventual watering down or repeal given the potential for: 1) a Trump victory; 2) growing bi-partisan support to kill the bill; and/or 3) legal court challenges,” they wrote in a note on the final rule.

To their point on political pushback, last month the U.S. House of Representatives’ Ways & Means Committee passed a bill to prohibit the HHS secretary from finalizing the minimum staffing requirements. And other lawmakers on Capitol Hill also have spoken out against the mandate, including on Monday.

“The President’s one-size-fits-all, Washington-knows-best approach to long-term care is an unfunded mandate that will drive up costs and threaten access for patients,” House Energy and Commerce Committee Chair Cathy McMorris Rodgers, a Republican from Washington, stated. “The minimum staff-to-patient ratio is unworkable for nearly 80 percent of nursing homes, requiring facilities to increase costs for patients or close their doors to new patients.”

Some nursing home leaders – notably New Hampshire Health Care Association President and CEO Brendan Williams – warned that the staffing rule could drive up the use of costly agency staff.

But operators have pushed hard to reduce agency labor coming out of the Covid-19 pandemic, and the BMO Capital Markets analysts believe that this trend will continue.

“We expect further moderation in contract labor utilization, which should help further boost rent coverage levels, along with improved occupancy,” they wrote.

With contributions from WTWH Media Editorial Director Tim Mullaney