Standard & Poor’s Rating Services put all six of its rated for-profit nursing home operators on CreditWatch with negative implications last week, causing continued fallout after the announcement by the Center for Medicare and Medicaid Services (CMS) that payments to skilled nursing facilities will be cut by 11.1%.
Drumm Investors LLC and Kindred Healthcare Inc., were both issued ‘B+’ ratings, and Genoa Healthcare Group LLC, HCR HealthCare LLC, Skilled Healthcare Group Inc., and Sun Healthcare Group Inc., all received ‘B’ ratings.
The recent announcement of the nearly $4 billion in Medicare cuts, which go into effect October 1, initially sent shares of health care REITs into a nosedive. The consequences grew far worse upon the S&P announcement, despite an initial projection by Moody’s Investor Service, which said the Medicare cuts wouldn’t have an immediate impact on the nursing homes’ credit ratings.
Moody’s prediction hoped nursing home operators could still see a small profit in 2011, but the S&P figures were in stark contrast, estimating a loss of 30-60% in adjusted earnings for the downgraded companies due to lowered reimbursement rates.
Factors affecting a decrease in earnings include the business mix, the proportion of nursing home service payor mix attributable to Medicare, and the contribution from therapy services for each nursing home company, says the S&P ratings service; however, cost management will likely adjust, in terms of labor expenses, to mitigate the effects of the Medicare cuts.
S&P says it plans to review the financial implications of the cuts in light of the aggressive and highly leveraged capital structures of the low-speculative-grade rated companies in this sector.
“In particular, we will focus on the effect of potential EBITDA declines on liquidity and each company’s ability to meet or revise tight debt covenant requirements in resolving the CreditWatch listings,” said Standard & Poor’s credit analyst David Peknay in a statement from the ratings service.
The Alliance for Quality Nursing Home Care (AQNHC) calls the S&P rating a “direct result” of the Medicare announcement, speaking to the profound affect the cuts will have on the nursing home industry.
“The S&P action will have a negative, immediate impact on small and large operators alike because banks who lend to regional and other local providers monitor actions by S&P, and this will increase their reluctance to lend to the sector, as well as increase costs for borrowers,” said Alan Rosenbloom, President of AQNHC, in a statement. “As the lowest margin provider, nursing homes face rising costs and plummeting Medicaid payments. This confluence of events puts our patients, our workers and our entire sector in clear and present danger. This is a very serious action by S&P, and is a direct, unambiguous signal to the Administration and Congress that our sector can take no additional cuts.”
Written by Alyssa Gerace