Fitch: Medicare Cuts to Significantly Increase Skilled Nursing M&A Activity

Even with the Centers for Medicare and Medicaid Services (CMS) decision to reduce payments Medicare skilled-nursing facility by $3.87 billion in fiscal 2012, healthcare REITs are in a strong position to deal with the cuts and M&A activity will thrive, says a new report from Fitch Ratings.

Operators that are well-capitalized will fare better than others in the coming months, and the cuts are expected to significantly increase acquisition activity as efficient operators emerge, says Fitch. Healthcare REITs should manage the cuts fairly well considering they have the ability to renegotiate key terms of contracts and change operators when facilities are underperforming.

“REITs are prohibited from operating the facilities that they own, so their ability to find good operators and adapt to changing market conditions are important strategic elements. The REITs are continually managing their portfolios to deal with changes in the industry, including changes in patient care, operator merger activity, and facility-level challenges,” analysts said in the report.


While the Medicare cuts were dramatic, the move was telegraphed in the spring by CMS in order to solicit market feedback. However, the changes will bring uncertainty to the market until owners and operators of skilled nursing facilities (SNFs) implement strategies to manage the reimbursement cuts.

“The reimbursement volatility will affect the profitability of these facilities, although some elements of the cuts are likely to be offset by expense reductions undertaken by the operators,” analysts said.

As a result, costs associated with patient care could be trimmed, but the majority of savings are likely to come from reducing overhead expense. CMS doesn’t agree, telling SHN in August it doesn’t expect payment reductions to result in staff layoffs after survey data showed that additional payments made last year did not lead to an uptick in hiring at facilities.


While Fitch expects the healthcare REITs they rate to remain strong, a report from Avalere Health expects the CMS cuts to reduce payments to skilled nursing facilities by $79 billion over 10 years and slash economic activity by $6.75 billion in FY 2012.

View a copy of the report here.

Written by John Yedinak