Skilled Nursing Facilities: What Challenges Lie Ahead?

Frank Small, senior managing director & chief investment officer, Greystone

The future of skilled nursing facilities (SNF) has been a popular topic within the health-care and senior housing sectors, as occupancy rates continued to decline throughout the year. Moreover—beginning Oct. 1, 2019—a new case-mix model known as the Patient-Driven Payment Model (PDPM) will replace the existing case-mix classification methodology. As PDPM links skilled nursing reimbursement to value rather than therapy volume, operators need to learn how to rapidly adapt to the changes that PDPM entails. 

Multi-Housing News reached out to Frank Small, senior managing director & chief investment officer at Greystone Healthcare Investments, to share his point of view on the current state of the SNF market and how the upcoming changes are already impacting the sector. While some owners and operators are considering to exit the SNF market prior to PDPM taking effect, others are looking for ways to successfully respond to this inevitable shift.

What is causing occupancy declines in the SNF sector?

Small: There are a number of factors creating the industry headwinds, including changes in reimbursement by both public—federal and state—and private payers, wage pressure and competition from alternative sites: Long-term acute care hospitals, assisted living and home health.

What do the new regulatory and market reforms involve? How do you think PDPM will impact the SNF sector?

Small: PDPM curtails the emphasis on overall volume of therapy hours and incentivizes treatment of higher acuity patients. Operators who have historically focused on treating high-margin Medicare patients through the provision of therapy are likely to face a dynamic shift in their revenue stream. The new PDPM system will require operators to generate revenue from a more diversified provision of existing services, which will require more sophisticated systems to account such care. 

Transitions of this magnitude will be problematic in the short term for many operators. Over time, industry-wide, the impact should be positive, as PDPM better aligns payments with the provision of care and its attributable costs. On an asset-by-asset or operator-by-operator basis, the impact will be much more varied with winners and losers. The nimble, well-prepared operators with strong IT systems will succeed.

What changes can already be seen in the SNF sector?

Small: In addition to activity from owners and operators looking to exit prior to PDPM kicking in, there are concentrations of activity in states that have recently seen a change in the reimbursement models. Subsequent struggles and outperformance are leading to transaction activity. Publicly-traded REITs continue to divest SNF holdings with an eye on reducing concentrated operator relationships and struggling performers.

What are the main challenges of investing in SNF?

Small: Skilled nursing is a highly regulated, asset-heavy operating business that essentially has a different business model in each state, so gathering and maintaining a strong working knowledge of all the intricacies of this complex business is essential. We achieve this with a keen focus on our operators. We firmly believe that operators are the primary key to success, even in a NNN-leased structure. 

Please tell us more about financing trends you are currently seeing in the sector. 

Small: The debt capital market continues growing with new banks and financial companies entering the market on a regular basis. Private investors have also increased equity investment activity as the publicly-traded REITs have become net sellers. There is certainly capital available for high credit-quality investors.

What are your predictions for the future of the SNF market?

Small: Broadly speaking, we see an enduring, need-based demand for the care and services provided by SNFs. Local and regional operators with little-to-no corporate bureaucracy will continue to outperform the large, national operators. Remaining nimble, narrowly focused on specific states, and driven by a mission to provide high quality care will be the keys to success going forward.

Image courtesy of Greystone