Will Sequester Cuts Crush Senior Care Providers & Investors?

For senior care providers, gearing up for “March Madness” this year probably doesn’t mean filling out an NCAA tournament bracket—it means scrambling for ways to mitigate a new round of reductions to Medicare reimbursement rates currently en route to the industry. 

Barring Congressional action, skilled nursing and rehabilitation providers are in for a 2% sequestration-induced payment cut next month, on top of the average 11.1% reduction announced in the fourth quarter of 2011. 

Five quarters later, providers are generally reporting positive financial performances due to their companies’ ability to mitigate the effects of the cuts, but they’re not out of the woods yet. When Congress reached a last-minute New Year’s deal to stop the nation from going off the “fiscal cliff,” it merely delayed automatic, across-the-board spending cuts stemming from debt deficit reduction efforts, pushing them from Jan. 1 to March 1.

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The impact on the skilled nursing facility (SNF) sector in the U.S. will be about $9 billion, according to nursing home trade group the Alliance for Quality Nursing Home Care.

Although it’s still possible—but increasingly unlikely—that sequestration will be avoided, Brookdale Senior Living built the upcoming 2% reduction to Medicare rates into its 2013 guidance.   

Sequestration will affect “both skilled nursing rates in the senior housing portfolio and home health and outpatient therapy rates in the ancillary services segment,” Mark Ohlendorf, Brookdale’s CEO, noted.

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Brookdale has about $360 million worth of Medicare revenue, including skilled nursing, outpatient therapy, and home health, and expects an approximately $7 million a year impact from 2% cuts. 

“I think our initial objectives around cost mitigation here is to cover half or more of the MPPR rate impact,” said Ohlendorf. “Skilled nursing side, obviously we’re looking for opportunities there as well. That’s our general sense.” 

Five Star Quality Care was adversely impacted by about $17 million in 2012 from the previous year’s fourth quarter reduction to Medicare rates, although president and CEO Bruce Mackey said the company “overcame” the cut during a conference call with investors.  

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“We had some significant headwinds two years ago when they cut Medicare by 11% and we offset those,” Mackey said. “While we’re not happy to see more rate decreases coming, I think it is probable that we’ll see a 2% rate cut effective on March 1.”

Five Star has made a drive in the last 10 years for private pay business, Mackey noted, and more than 75% of its senior living revenues come from private pay rather than Medicare. While the company will be affected by a 2% cut to Medicare rates, the impact will only be felt on a “small part” of its business.

“Years ago, it would have been devastating but today, we’ll more than offset it with our private pay growth and I expect to offset some of this through acquisitions as well,” he said. 

Regarding income from its minority ownership in HCR ManorCare, HCP Inc. is looking to growth in other service areas to mitigate possible reimbursement changes.

“Any additional cuts will be more than offset by continued growth in the other HCR business lines as well as the delay in sequestration,” said HCP CEO Jay Flaherty. 

While providers seem optimistic about being able to turn a profit despite further cuts, the Alliance’s president, Alan Rosenbloom, says the skilled nursing industry’s viability is at a tipping point. 

“If government continues to pursue what amounts to a default policy of more cuts, the SNF sector will become unsustainable,” Rosenbloom said. “The unintended consequences of these cuts and regulatory actions will affect access, quality, and require that care increasingly be rendered in settings that actually increase the cost to government. This zero-sum status quo is wrong for seniors, providers, taxpayers and the future of our entire U.S. health care system.”

Written by Alyssa Gerace

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