Obamacare, Medicare Cuts Could be Death Knell for Up to 50% of Nursing Homes

While some herald the Affordable Care Act as a much-needed reform bill that will change the face of the healthcare industry, others say it may contribute to forcing up to half of the nation’s hospitals and long-term care facilities into a merger or out of business altogether in upcoming years.

A lot of factors play into the possibility of widespread distress among smaller hospital systems and skilled nursing facility operators, including ongoing pressure on state Medicaid budgets, past Medicare cuts to the skilled nursing industry, and the $716 billion taken from Medicare in the next decade to help fund President Obama’s monumental healthcare reform bill.

“I think the smaller facilities will have a very difficult road going forward, and up to half of the hospitals and long-term care facilities are probably not going to make it,” says William Day, president and CEO of Pennsylvania-based St. Barnabas Health System. “The single-purpose facilities that only offer nursing services will be the most vulnerable.”

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Both non-profit and for-profit senior care communities and hospitals that are smaller and already have small margins may be in a particularly tricky situation.

“There have been a lot of mergers already, even with hospitals,” Day says. “Sometimes we can predict the future by seeing what’s happening with ‘sister’ institutions. Hospitals have been joining together for a long time now, because they think it’s better for their survival, in terms of centralized purchasing and other economies of scale. Will that happen in the long-term care industry? No doubt.”

In the next 10 years, the skilled nursing industry will essentially contribute $14.6 billion to healthcare reform in the form of Medicare cuts, says Paul Bach, executive vice president at Genesis HealthCare.

“While the industry wants to participate with other healthcare provider groups with the reform, at the same time, we’re concerned with the viability of the industry, coupled with other factors,” he says, citing frozen Medicaid rates as an example. “That has a significant impact on nursing facilities. There’s significant concern around the industry’s sustainability.”

In order to avoid the vulnerability that can accompany offering only one type of skilled nursing service, Genesis is looking for ways to prepare for what’s ahead.

“There’s a lot of focus on cost reduction: how can we make cuts to operating costs in our facilities that will not lead to a negative impact on quality, and how can we do that without experiencing much in the way of a reduced workforce?” Bach says.

At the same time, Genesis is positioning its communities to take advantage of other, more beneficial aspects of the ACA that can result in shared cost-savings. This includes participating in accountable care organizations (ACOs) and partnering with health systems and home healthcare agencies as part of a larger managed care movement to reduce hospital readmissions, thereby helping hospitals avoid reimbursement penalties from Medicare for rehospitalizations above a certain threshold.

Many larger skilled nursing chains are taking similar steps, but not all nursing homes have the scale or ability to do this.

“For smaller operators, they’re under the same pressure large, multi-location facilities are under, and there’s a need for them to be progressive and proactive in how they plan to respond to what’s in the ACA,” says Bach. “We expect there would be more consolidation within the industry as a result of reimbursement cuts and the types of policy innovations that are taking place.”

At this point, it’s hard to tell how exactly healthcare reform, along with the fiscal cliff and Medicare and Medicaid-related budgetary concerns, will impact the skilled nursing industry.

“[The ACA] is a landmark reform that can change the landscape [of the industry] in unseen ways,” says Daniel Bernstein, an analyst with Stifel Nicolaus. “It will take a couple years to play out and see how operators adjust. There are pressures, and there’s a lot of speculation with consolidation within the industry. There are going to be some changes to the industry structure in the next couple of years.”

Those changes could come from large operators who want to continue to gain more scale, he says, or from family-run operators who don’t want to deal with the rapid changes that are happening with reimbursements and healthcare reform.

Although many of the major healthcare REITs are tending to avoid skilled nursing—mindful of valuations they’re given for diversifying into non-publicly reimbursed assets such as medical office buildings or senior housing assets—others, such as Omega Healthcare Investors (NYSE:OHI) and LTC Properties, Inc. (NYSE:LTC) are taking advantage of the lack of interest in skilled nursing assets to buy them at good yields, says Bernstein.

“REITs are still the primary consolidator of healthcare real estate across all the asset classes, including skilled nursing,” he says. “You could see some acceleration of M&A at some point depending on how healthcare reform and budget concerns shape up. With additional reimbursement pressure on operators, you’re likely to see more consolidation.”

Written by Alyssa Gerace

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