Senior Housing Operators Work to Mitigate Impact of Medicare Cuts in Q4

After a widespread outcry in the skilled nursing industry following the announcement of an 11.1% reduction in Medicare reimbursement rates, many SNF operators are finding ways to stay profitable and mitigate the effects of the cuts that went into effect at the start of the fourth quarter.

Earnings conference calls for senior housing operators and health care real estate investment trusts (REITs) revealed focused action to diversify portfolios, increase private-pay ratios, reduce costs and cut down on all unnecessary expenses.

Ensign’s operators were able to maintain both clinical and financial performance during the quarter, according to CEO Christopher Christensen, while creating “meaningful long-term solutions” to the recently-implemented rate cut.

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“These dedicated teams, immediately upon the announcement and rather than waiting for instructions from anyone, began putting all of their expenses which are not directly related to patient care under the microscope and making appropriate adjustments,” said Christensen during Ensign’s earnings conference call. “We expect this combination of expense reduction, operational efficiency and continued movement in occupancy and skilled mix to significantly offset the reimbursement reductions and other changes.”

Many operators felt the strain of the cuts, and some, like Five Star Quality Care, based their strategy on reducing Medicare dependency.

“As we’ve been very active in growing the company in the private pay space, the EBITDA we expect to receive from our 2011 acquisitions will help to offset majority of the Medicare rate cut,” said Bruce Mackey, Jr., president and CEO of Five Star.

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Less than 15% of Five Star’s senior living revenues come from Medicare, and the company says this will continue to decline as it grows its private pay portfolio.

Some operators have reacted to the cuts by lowering their revenue outlook, like Sun Healthcare Group.

“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 CEO of Sun Healthcare Group, in a statement. “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.”

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In terms of REITs, many spoke of the need for careful underwriting, planning ahead, and diversified portfolios.

“To protect against the uncertainty of SNF Medicare reimbursement we are underwriting with 13% cuts from the CMS fiscal year 2011 Medicare run-rate,” said Justin Hutchens, CEO and president of National Health Investors REIT, in an interview with the National Investment Center (NIC). “This takes into account the 11.1% cuts that have occurred and a potential 2% more which we believe should be contemplated in underwriting, though this is not a certain outcome.”

At HCR ManorCare, operators wasted no time in making efforts to mitigate the effects of the rate change once they were announced in August, according to James Flaherty, the president and CEO of HCP, Inc., which acquired the nursing home nearly a year ago.

“They had their action plan set up, and depending on the outcome of that CMS directive and when it was communicated, they went into implementation mode immediately,” said Flaherty in an earnings call. “I think all those measures were put in place with an effective date of Sept. 1, so they were all over this.”

For its part, Ventas CEO Debra Cafaro said in an earnings call that the REIT has “strategically invested with a goal of diversifying its portfolio and increasing its private-pay revenues. We continue to believe that our skilled nursing rates are well covered and should provide sustainable cash flow to Ventas,” she said.

Going forward, Ventas president Raymond Lewis stated the REIT’s intention to remain involved in the skilled nursing industry and make acquisitions despite recent headwinds, as it’s going to be “an important part of the healthcare system.”

“I think people are very internally focused on making sure that they… focus their efforts on mitigating the cuts, that they are working on their operations rather than thinking about monetizing their portfolio in a relatively less certain environment,” said Lewis. “As this plays out, there may actually be some good buying opportunities, and we’re going to keep our eyes peeled for that.”

Written by Alyssa Gerace

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