Skilled nursing facilities (SNFs) within life plan communities (LPCs) remain pressured even as LPCs overall saw a revival in fiscal 2023, with labor being the biggest challenge for the nursing home assets within these campuses, according to analysts for Fitch Ratings.

“The LPCs sector is experiencing a recovery following the post pandemic period that was marked by significant inflationary challenges and high cost of capital,” said Margaret Johnson, senior director and sector lead for senior living at Fitch Ratings. Johnson spoke at a webinar Friday to discuss Fitch Ratings’ new sector monitor report for 2024. 

However, the SNF assets continue to be a pain point for LPCs, she said.

“[Given] their disproportionate exposure to wage and staffing pressures, coupled with government reimbursement rates that have not kept pace with heightened expenses … these organizations also tend to be lower rated,” she said. “Without a significant [independent living unit] component generating cash flows, it has been difficult for them to amass a significant enough balance sheet cushion that would allow them to weather the storm.”

The SNF challenges

LPCs of this type have experienced the most severe downward rating pressure since the pandemic, according to the Fitch sector report, which notes that this has led to default in some cases, since exposure to government payors limits their ability to raise rates relative to traditional LPCs that are primarily ILUs, all of which are private pay. 

SNFs have seen a slower level of occupancy recovery compared to the other assets within the LPCs as SNF-heavy LPCs remain more prone to impact from operational pressures.

“Staffing pressures are necessitating a sector-wide reckoning in terms of right-sizing skilled nursing. And some LPCs are limiting skilled nursing admissions to only their residents,” Johnson said, adding that perhaps some of the skilled nursing residents are increasingly being diverted to memory care units.

Meanwhile, the preference to age at home is growing too, she said.

In addition, LPCs with significant SNF exposure have less flexibility to remove portions of their SNF beds. This weighs heavily on the SNF-heavy communities’ ability to manage costs, particularly as it relates to their reliance on agency nurses.

“Similar to a hospital, these types of LPCs are hard pressed to remove SNF beds from their service due to their reliance on external admissions for a substantial portion of their core operations,” Johnson said.

Moreover, SNF-heavy LPCs are being closely watched for a potential heightening of regulatory requirements, including how the minimum staffing ratios eventually play out. 

“We believe [the staffing mandate] will exacerbate pressure for skilled nursing operations and accelerate the trend at traditional LPCs of reducing their skilled nursing capacity,” Johnson said.

A job outlook report also issued Tuesday by Fitch Ratings suggests that employment at LPCs and SNFs remains below pre-pandemic levels due to labor shortages, increased costs as well as a shift toward home-based care and other alternatives.

In contrast, assisted living facilities (ALFs) and the private sector have surpassed their pre-pandemic employment figures, the report suggests.

“Demographic trends favor long-term demand growth for senior services, with the last of the Baby Boomer Generation turning 65 by 2030, but service providers will need enhanced strategies to boost their workforce pipeline amid weak payroll recovery,” the labor report states.

The health care and social assistance job openings rate continues to decline steadily, from 7.9% in January to 6% as of July as quit rates remain elevated compared to the 4.2% average rate between 2010-2019, according to Fitch’s latest labor report.

All said, following signs of operational recovery in fiscal 2023, capital expenditures will start to tick up in fiscal 2024 for LPCs, according to Fitch Ratings’ medians report for the sector.

This outlook is even more evident given the Fed rate cut of 50 basis points this week as LPCs seek to capitalize on favorable demographic trends, Johnson said, which remain a tailwind for the sector.