If there’s no additional funding for the minimum staffing rule, well over 5% of existing facilities will close, depending on how successfully operators can pivot to meet the standard.

The rates of closure may even reach 10% to 15%, depending on the market, cautioned sector leaders attending the LTC100 conference this week.

Steve Nee, CEO of Diversicare Healthcare Services, and Michael Blisko, CEO of Infinity Healthcare Management, were joined by Lynn M. Hood, president and CEO of Principle LTC and Jason Murray, CEO of the PACS Group (NYSE: PACS) for a discussion on the implications of the staffing mandate. The panelists also discussed growth strategies and moving the needle on risk-based model reimbursement. 

Blisko said he expects the nursing home staffing mandate to impact Infinity by over $30 million. Since the average margin across the nursing home sector is between 1% to 2%, the mandate would erode that small margin even further if it remains unfunded, Murray said.

Moreover, if nothing changes with supply and demand of nurses, the fight for registered nurses (RNs) in particular is going to be a “bloodbath” when trying to meet the mandate, added Blisko.

“We already know as an industry what happened with agency [use] … inevitably [the mandate is] going to facilitate closures and it’s also going to become cost prohibitive for any of us to survive,” he said.

Still, there are a lot of unknowns. The industry won’t know the ramifications of noncompliance until the rule is published in the Federal Registry – which is expected to happen on Friday, said Nee. And in cost-based states like West Virginia and Alabama, where reimbursement is tied to utilization, providers may see a decrease in reimbursement as utilization goes down, he said.

In the midst of the minimum staffing rule being finalized by the federal government, surveyor shortages remain. Blisko pointed out the hypocrisy of the government’s move given that the industry lags behind in surveys due to a surveyor shortage and despite knowing there’s a workforce crisis in the nursing home industry.

“One thing that’s kind of comical and sad at the same time is that we have a survey backlog going on … But at the same time, fast and furious we’re rolling out a mandate on nursing,” said Blisko.

Meanwhile, there’s expected to be a shortfall of a quarter million nurses by 2025, and on top of that, about a third of the current nurses will retire in the next five years, according to Emergency Nursing Magazine.

A mix of M&A outlooks

As operators prepare for the minimum staffing rule amid current economic pressures, outlook for mergers and acquisitions activity varies. The industry is in “retrench” mode for some, with a lot of scrutiny circulating about growth. But for other sector players, now is the time to divest their core performing SNF assets, said Tim Craig, managing director for LTC100 and moderator for the panel.

Diversicare went through a significant retrenchment in the last couple years, going from a publicly traded company to a private company and reducing their footprint by about 33%, said Nee. The provider currently operates 46 nursing homes.

“For us, it really has been a matter of self reflection, looking at what buildings continue to make sense for us and ones that don’t – we’re evaluating those relationships and deciding which buildings to potentially jettison,” said Nee.

Factors that impacted this restructuring involved looking at a more local footprint, and deepening involvement in states that were deemed favorable for operations, he said. From a personal and mission standpoint, ensuring it’s easier to staff up in a particular state made a difference too, Nee said.

Finally, in adjusting its portfolio, the Diversicare team looked at economies of scale and ensured there was support, resources, and not too many extra costs associated with the changes.

Blisko agreed with Diversicare’s approach despite actually growing. The team at Infinity concentrated growth on markets in which it already had a presence, in addition to markets where staffing reimbursement and litigation offered favorable environments.

Most important for Infinity was gaining an understanding of staff, from the top down, on who can be relied upon, who is “on the bench,” and what the skill set is, as well as a realistic timeline for M&A execution.

“As we grow, we realize we’re not going to move at the same pace as we were able to when we were smaller. Expectations in terms of how long it can take to turn an asset – knowing your size and knowing who you’re going to rely on in the field is very important,” said Blisko.

As for PACS, which recently went through an Initial Public Offering (IPO) along with proceeding with multiple acquisitions, Murray said his team is very calculated and measured in waiting to do the underwriting and determining new targets.

PACS approaches new deals with pointed questions before pulling the trigger. So questions about occupancy percentage in a particular state, what the fair share is for skilled mix, what the regulatory environment is like in the state, what does Medicaid reimbursement look like and whether there are add-ons, are all important to answer heading into an M&A, according to Murray.

“We essentially put [these factors] into a scorecard system that allows us to rank states as well as subsectors within states to know where it makes sense for us to grow,” said Murray. “By doing this, it allows us to be more calculated, and also disciplined in our approach.”

Acquisitions need to make sense for PACS and its timeline, added Murray. There were several deals over the years, where conversations started with potential sellers and terms and conditions just didn’t make sense at the time. In these cases, the decision was made to pause and wait, and sometimes the same opportunities came around again in a more favorable light, he said.

Meanwhile, Principle LTC, a skilled nursing facility management provider with forty-five facilities in North Carolina, Kentucky and Virginia, is not divesting nor purchasing right now, Hood said. The team has successfully obtained five new certificates of need to build new facilities while retrofitting older facilities with more private rooms and expanded rehab suites. 

“While I say we’re not purchasing, we do have in our future plan the building of five new facilities in North Carolina, which we’re really excited about,” said Hood.

Rate compression and risk-based models

Panelists also addressed questions on reimbursement and how risk-based payment models have changed payer mix. There’s been a “significant change” in the reimbursement for managed care, Murray said, with it being a small fraction of PACS revenue not too long ago.

“We’ve really worked hard to be in a position to perform well clinically. As we perform well clinically, we believe strongly that it will allow us to have a seat at the table when contracting and negotiating rates,” said Murray.

Making sure to focus on quality and outcomes, and having a geographic density for operations gives PACS greater leverage when negotiating managed care contracts, he said.

“If we’re performing well clinically, those payers tend to see that. [We did an acquisition, we were able to perform well clinically and our rates increased,” he said. And, as a result, the property’s volume of managed care also increased. However, some of the rate compression seen in many states could offset this, he added.

Gone are the days when census and acuity were the driving force around reimbursement, said Nee. Now, quality and outcomes are the big indicators of rates in managed care. Diversicare is involved in an accountable care organization (ACO) and an institutional special needs plan (I-SNP) with Optum, and is looking at another managed care partnership in Texas as well, he said.

As for views on incentives for improving quality and outcomes, panelists had mixed reactions to increasing withholdings for value-based models; 10% was floated as a new withhold hypothetical during the panel. Increasing the withholdings for a given model would also increase payout for operators, they said.

Of the 2% withhold for value-based purchasing (VBP), the Centers for Medicare & Medicaid Services (CMS) only allows 60% of that 2% to go back to the operator as an incentive, while 40% goes to the Medicare trust fund hopper, said Nee. 

“Forty percent of that 10% is going to go back into the Medicare trust fund, siphoned away from SNF providers. I cannot advocate for that,” said Nee.

Blisko and Murray were generally in favor of increasing withholdings, but with some caveats. Before considering moving the needle with VBP withholdings, operators should not be all in on one of those models. They should also be paying attention to the kind of patients they’re dealing with and the costs associated with that care, they said. And, consideration should also be given to how a facility is going to rank when taking on more risk when increasing withholdings.

“If you’re going to get slammed on your rehospitalizations, and you have an unrealistic criteria that you’ve created because you’ve now moved the needle [with taking on more risk], it’s going to haunt you later on,” said Blisko.