For many years, members of the skilled nursing community have been voicing concerns about the sector’s ability to remain viable in the face of continued reimbursement cuts from the federal government. A new analysis bolsters their argument that SNFs are on shaky ground.
“Skilled Nursing Facilities: Margin Performance and Access to Capital,” examines the profit margin performance of and access to capital for SNFs in order to draft a picture of the SNF economic climate.
[See also: Skilled nursing facilities warn of zero profits if more cuts are made]
The analysis was done by Lambert van der Walde, a former capital markets advisor to the Centers for Medicare & Medicaid Services’ administrator in both the George W. Bush and Obama administrations. He is now the president of van der Walde & Co., a healthcare finance and policy advisory firm. The report was commissioned by the Alliance for Quality Nursing Home Care, which merged with the American Health Care Association (AHCA) on July 1 and is now using the AHCA name.
The analysis was based on financial data provided by 10 large skilled nursing providers who were members of the Alliance between 2010 and 2012. The analysis does not factor in the sequestration cuts.
Van der Walde’s analysis found that company margins have been declining from 2010 to 2012 and that median net income has been nearly halved, from 1.8 percent in 2010 to less than 1 percent in 2012.
This squeeze on margins means that SNFs have fewer resources to use to pay competitive wages, maintain benefits plans and invest in the technologies needed to provide high-quality care, said Alan Rosenbloom, the Alliance’s former president.
The report also notes that while SNFs do have access to capital, they face challenges that other healthcare sectors do not.
“… the SNF sector – at least these bigger chains – are certainly able to raise capital, but it’s expensive relative to other sectors and it’s typically limited to debt financing, so the sector is dependent on high-yield bonds and bank loans,” van der Walde told Healthcare Finance News.
For example, in van der Walde’s analysis, he compared Kindred Healthcare’s B3 bond to hospital companies Health Management Associates and HCA. All three organizations have the same credit ratings but Kindred’s B3 bond trades at a 7.8 percent yield, while HMA trades at a 5.5 percent yield and HCA at a 4.3 percent yield.
The differences between the rates for SNFs and those of, for example, hospitals, is related to how each sector is paid said Kerri Schroeder, senior vice president and credit products executive for specialized industries at Bank of America Merrill Lynch.
Because of the demographics SNFs serve, the sector has a high reliance on reimbursement from Medicare and Medicaid whereas hospitals, for example, generally have a better mix of commercial pay versus Medicare and Medicaid, she said.
And because Medicare and Medicaid reimbursement is so uncertain, explained J.P. LoMonaco, president of Valuation & Information Group, a healthcare valuation and information service firm headquartered in California, investment risk is increased.
“Any time there’s more risk, it’s going to require higher returns and investors are more cautious,” he said.
That said, LoMonaco noted, SNFs have better access to capital now than they did two years ago during the financial downturn because lenders have been returning to the market. Healthcare REITs, in particular, are opening up doors for SNFs, he said.
The SNFs that really face a tough road are the smaller operators, he said. “I don’t see a bright future for those small, family-owned mom-and-pop type of operators,” he said. “With all the other challenges they face, I think access to capital will only get tougher in the future for them.”