Medicare Cuts Unlikely to Impact Activity of HUD Skilled Nursing Loans

After the Centers for Medicare & Medicaid Services decision to slash payments to skilled nursing facilities by 11.1% starting Oct. 1, the senior housing industry is beginning to see the impact on loans backed by the Department of Housing and Urban Development.

Last week, HUD said the 3.87 billion in cuts will affect loans currently submitted for the agency’s Section 232 program. While the CMS announcement represents an average rate reduction, the actual cuts disproportionately affect the higher-acuity rehab RUG categories, HUD said.

“To address this, all applications that are currently in the queue and that include underwriting based on FY 2011 Medicare reimbursement rates must be re-underwritten to reflect the FY 2012 Medicare income and expenses,” said HUD in an email to industry participants.


HUD’s decision to re-underwrite the files was anticipated by lenders following the CMS announcement.

“We have been doing this same analysis internally for some time now and do not anticipate that it will negatively affect those loans being pulled from the queue right now,” said Nick Gesue, senior vice president of Lancaster Pollard in an email to SHN.

Most loans sitting in the “queue” have been there for for quite some time due to the increase in HUD 232 applications over the last year. As a result, loans in the queue were typically underwritten by lenders prior to the 2011 RUGs payment increase, said Gesue.


“Most lenders and appraisers have known that the current RUG IV payments were not sustainable and it was not prudent to base underwriting decisions on those inflated levels,” he said. “We as well as HUD are being very cautious when we evaluate skilled nursing projects because of the recent cut in Medicare payments.”

While some form of cuts were expected from CMS, it could still have a bit of a negative impact.

“The potential concern would be for loans sized in the first half of this year and submitted before the cuts were announced,” said Gesue. “These may have been sized with the expectation of a smaller cut than actually occurred.”

During an interview with the National Investment Center, Casey Moore, Senior Managing Director of Red Capital Group, said he doesn’t expect the CMS payment changes to have a huge impact.

“This ruling won’t have as much of an impact on transaction activity as it could on loan sizings, which may be lower than originally contemplated,” he said. “HUD remains the primary outlet for long-term financing for the skilled nursing sector and this ruling is not expected to change that to any degree.”

Written by John Yedinak