The failure of the “Supercommittee” to reduce the federal deficit by $1.2 trillion over the next 10 years could lead to an across-the-board 2% cut to all government agencies, putting more pressure on senior housing operators and slowing transaction activity.
The industry was hit with an 11.1% reduction in Medicare reimbursement rates for skilled nursing facilities by the Centers for Medicare and Medicaid Services earlier this year, representing a loss of $79 billion in reimbursements over the next decade.
Any additional cuts from the Supercommittee will result in lower profitability, but not all operators will see dramatic hits.
“It still does not result in a world where these operators are so unprofitable as to need rent relief or so unprofitable that they actually go bankrupt and all of a sudden they have no ability to pay rent at all,” said Omotayo Okusanya, a managing director in the equity research department as Jefferies & Company, Inc., in a Medical Real Estate Report.
Health care REITs, which accounted for 94% of sales activity in the senior housing industry in the first half of the year, according to the National Investment Center for the Seniors Housing & Care Industry, should still be able to manage fairly well.
“The operators are less profitable and their ability to pay rent has become a little bit more challenged, but not challenged to the point where we see meaningful cash flow risk in regards to the rental income that the health care REITs get from their tenants,” said Okusanya.
In the second half of the year, transaction activity has slowed and some say it will continue to drag in light of the political environment.
“I think until the whole government reimbursement issue resolves itself and we know where things are heading, I think transaction activity on the skilled nursing side is going to slow meaningfully,” said Okusanya.
European economic issues and slower growth in the U.S. could also impact transaction activity, as management teams will wait to see how credit and debt markets settle before making large acquisitions, said Okusanya.
While analysts aren’t putting too much emphasis on cuts, some healthcare operators are reacting conservatively to the cuts and the possibility of more by lowering revenue expectations for the upcoming quarter.
“Our analysis demonstrates that the rate reductions imposed by the CMS final rule have far exceeded the stated goal of parity with prior Medicare rates, and we remain concerned that these reductions may have serious consequences for our entire industry,” said William A. Mathies, chairman and chief executive officer of Sun Healthcare Group. “That said, we are moving expeditiously to mitigate the impact of the rule on our operations while retaining our focus on our primary mission of providing quality care.”
With five weeks left before the Nov. 23 deadline, the chance of the Supercommittee striking a deal looks slim.
“I think it is highly unlikely that they reach an agreement,” Dean Baker, from the Center for Economic and Policy Research, told SHN. “Most of the Republicans will not go along with any tax increases and are reluctant to support cuts to defense. There is no way that Dems will support cuts to Medicare and Social Security without some real tax increases.”
For some in the senior housing industry, the predictable, across-the-board cuts may be preferable rather the more significant cuts suggested by the Supercommittee.
“Most sectors would do much better with a 2% cut,” Baker says, but, he points out, that doesn’t get you $1.2 trillion in savings.
Written by Alyssa Gerace