Medicare Cuts Didn’t Squash Skilled Nursing Industry, But More Just Might

There was widespread uproar in the skilled nursing industry last summer when the Centers for Medicaid & Medicare Services (CMS) announced an upcoming cut to Medicare reimbursement rates. The cuts have been in effect for a full quarter now, and it looks the industry is still hanging on—for now.

REITs: Less Impacted Than Expected

  • HCP, Inc.: After being faced with an average 11.1% reduction to Medicare reimbursement rates, skilled nursing operators were forced to find ways to cut costs and remain profitable, which HCR ManorCare was able to do, according to its joint venture partner HCP, Inc. (NYSE:HCP).

    “HCR feels they’ve made the transition to a new cost structure well,” said Jay Flaherty, CEO of HCP during an earnings call, adding that part of the transition involved cost reductions.


    However, the danger’s not over yet, with President Obama’s budget proposal including $300 billion of Medicare cuts in the next 10 years.

    “This continues to be a challenging space,” Flaherty acknowledged. But he also sees potential opportunities arising for HCR.

    One such opportunity would be “if CMS moves to a site-neutral reimbursement sort of protocol for patients that had a surgical procedure in an acute care hospital and make that discharge, whether it’s to a rehabilitation property, or an LTACH or a post-acute property,” he said. “If they make that site-neutral in terms of the reimbursement, which is not the case today, given HCR’s low-cost model, that would actually be quite an interesting development.”

  • Health Care REIT: Health Care REIT’s skilled nursing portfolio was actually less impacted by the cuts in the fourth quarter than originally expected, according to Scott Estes, the REIT’s chief financial officer.

    “Although significant, the Medicare daily rate impact through December and January was actually somewhat less than originally projected when considering the potential impact above the 11% Medicare rate reductions and the changes in reimbursement for therapy services,” he said during the fourth quarter earnings call.


    One of the REIT’s operators, Genesis, is working on increasing occupancy and improving quality mix, Estes, continued, and they’ve developed a plan to expand the short-stay post-acute component of their portfolio to grow overall quality mix at a faster pace than in recent years.

    “The bottom line is, we’re really focused on just a handful of key relationships in the skilled nursing post-acute area,” he said, adding that there’s only about five to seven operators that HCN is likely to continue growing with. In the meantime, though, the REIT plans to “creep up our aggregate private payment” mix from the low 70s to about 80% “over time.”

  • Sabra Health Care REIT: The outlook for nursing home landlord Sabra Health Care REIT (NASDAQ:SBRA) looked pretty bad heading into last fall when the cuts were about to take effect, but the REIT’s shares have actually done well, according to a Dow Jones Newswire article, and it reported a positive fourth quarter net income. 

    “Sabra was vulnerable given that about 75% of its rental revenue came from Sun [Healthcare, its largest tenant], one of the nation’s largest nursing-home providers, which derived roughly 30% of its revenue from Medicare in 2011,” says the article. “Analysts warned that Sun was in danger of violating its debt obligations if it couldn’t come up with a plan to compensate for the cuts. But since then, Sun has assuaged Wall Street’s concerns partly by announcing very broad goals to cut corporate expenses and other costs.”

    “Our Tenant EBITDAR Coverage in the first quarter impacted by CMS’s 11.1% rate cut was 1.62x, which is better than anticipated,” said the REIT’s chairman and CEO Rick Matros in the fourth quarter earnings report. Sabra reported an FFO of $14.5 million, or $0.39 per share, and a net income of $7.2 million, or $0.19 per diluted share.

Sector Remains Uncertain with Possibility of More Cuts

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Operator Brookdale Senior Living said scenarios for future rate cuts remains uncertain.

“There is activity on the Hill, but I am not sure what will necessarily come out of that,” said chief executive officers Bill Sheriff during Brookdale’s fourth quarter earnings call. “The general view right now is at least that what we hear is most likely not much of a change, though there is still uncertainty to it.”

While it seems like some REITs’ and operators’ skilled nursing portfolios were weathering the cuts fairly well, that’s not true of the entire industry, says Greg Crist, vice president of public affairs at the American Health Care Association.

“Our owner-operators have done a pretty impressive job of mitigating the impact of the cuts,” he says. “But that’s far from meaning that everything is fine with the sector.”

Kindred Healthcare, for example, had a rough fourth quarter, posting a net loss of nearly $71.9 million that the company’s CEO attributed to “significant Medicare cuts” which impacted its skilled nursing and rehabilitation therapy businesses. It announced in its fourth quarter earnings report that it won’t be renewing leases REIT landlord Ventas for 64 healthcare assets, the majority of which were skilled nurisng facilities, because of limited future growth prospects.

AHCA said that CMS should have considered phasing in reverting back from the previous year’s overpayment. There were a lot of worries about changes to therapy that would occur as a result of the new reimbursement rule, and “those proved to be borne out,” says Crist, as therapy has now shifted almost entirely away from group therapy in favor of individual therapy.

A lot of non-therapy staffing has had to be reduced as a result of the changed payments, says Crist, and there’s an impending 2% sequestration cut along with a hefty reduction to “bad debt” reimbursements.

While some publicly-traded companies are better able to handle the cuts, it can be much harder for the mom-and-pop operators, and a lot depends on the facility’s resident mix.

“So far, we’ve been able to mitigate and manage those significant cuts, but there is a breaking point,” Crist says.

Written by Alyssa Gerace

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