The future success of skilled nursing facilities (SNFs) is hanging in the balance, as a recent report found that one-third of operators had a zero total margin or net loss even before sequestration occurred.
Net income margin for SNFs was cut nearly in half between 2010 and 2012 to 0.99%, according to a report from consulting firm van der Walde & Co., released by the Partnership for Quality Nursing Home Care.
“This new examination of SNF total margin performance and access to capital is as worrisome as it is insightful to helping define the growing threat to SNFs and, by extension, their patients and their workforce,” said Alan G. Rosenbloom, president of the Alliance.
Low profitability, tighter access to capital, as well as a constriction of Medicare and Medicaid payment rates suggest that SNFs will be unable to make key infrastructure investments necessary to treat increasingly older, higher acuity patients under the current environment.
“If profits are low, and little cash flow is generated to reinvest in the enterprise, the business will have difficulty providing its service and may not survive,” said Lamber van der Walde, the report’s author and president of the van der Walde.
In addition to facing trends toward low profitability and limited access to capital, the report finds that SNF sector capital is expensive and generally limited to certain types of debt financing, despite interest rates falling back to levels last seen before the 2008 financial crisis.
The debt market has also priced significantly higher risk into SNF bonds due to government payment risk, which in turn have led to increased borrowing costs.
Real estate cap rates for SNF assets were found to be roughly two percentage points worse than they are for senior housing assets.
The strife doesn’t end here for SNFs, according van der Walde, as current margin pressures are likely to be worsened by further federal cuts from the Medicare program in 2013 and beyond.
Mounting financial pressures could even force SNFs to reduce expenses by means of cutting labor, limiting technology investments, as well as cutbacks to facility renovations and new equipment.
“When total margins recede to the levels they are today, staffing and investments in the new technology needed to sustain positive quality trends are the first key variables to be negatively impacted,” said Rosenbloom.
The silver lining, according to Rosenbloom, is that the report’s findings can help sustain focus on devising a more “forward-lookin, rational” Medicare pst acute payment system to replace more cuts, more staffing and decrease greater threat to elder patients.
Written by Jason Oliva