SNF Companies Exiting a ‘Deteriorating Industry’

After a tumultuous year for some of the biggest real estate owners and operators in skilled nursing, many are looking at the future of the space with one foot out the door. Punishing skilled nursing headwinds are creating a “deteriorating industry,” with few attractive prospects for the largest companies for at least five years, according to a recent report from S&P Global Ratings. 

As some of the biggest holders of skilled nursing assets, real estate investment trusts (REITs) have been hard hit by their exposure to the space. Toledo, Ohio-based REIT HCP Inc. (NYSE: HCP) recently completed the spinoff of its skilled nursing assets, leased by skilled nursing operator HCR ManorCare, into a separate, publicly traded REIT. The assets had a significant drag on the HCP’s overall portfolio prior to the spinoff, and the new REIT, Quality Care Properties (NYSE: QCP), will likely renegotiate or restructure its master lease with the provider, S&P predicts. 

In addition, Chicago-based REIT Ventas Inc. (NYSE: VTR) recently announced it would likely sell 36 skilled nursing facilities (SNFs) to its operator Kindred Healthcare (NYSE: KND) for $700 million. The announcement came just one week after Louisville-based Kindred, one of the largest post-acute care providers in the country, said it would exit the skilled nursing space entirely. 


Drumm Corp., which owns the majority of its facilities, is similarly restructuring, with plans to divest its nursing home operations and other ancillary businesses. It will retain its real estate as a health care REIT and lease to other nursing home operators, according to S&P. 

REITs have big steps to distance themselves from skilled nursing headwinds through divestitures, but they may continue further reducing exposure, S&P predicts.

“We believe the majority of rated diversified health care REITs have largely completed the downsizing of their skilled nursing exposure,” Kristina Koltunicki, director at S&P Global Ratings, tells Senior Housing News. “However, continued portfolio pruning is expected.”


The exiting trend is a result of industry headwinds that have negatively impacted the largest companies. Unfortunately, the headwinds are likely to continue outweighing industry tailwinds.

Industry Headwinds

SNF operators and their real estate partners have been talking about the impact of a shift in patient mix for some time, but the the boom in the number of managed Medicare patients—up 300% to about 18 million beneficiaries over the past 10 years—has deepened the financial impact. Even increasing scale and volume of patients may not overcome the financial challenges SNFs are facing. 

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“On average, Managed Medicare plans reimburse nursing home operators about 20% less than the typical Medicare payment of about $500 per day,” the S&P report reads. “In addition, the managed plans are generally more aggressive about reining in patients’ length of stay and getting them discharged more quickly to a lower cost setting.”

As a result, SNF operators operators are dealing with lower reimbursement rates, shorter lengths of stay and lower occupancy rates. And the impact likely won’t let up. As the push toward lower-cost settings advances, this trend is likely to continue, S&P predicts. 

Some operators have stressed that higher volumes may help offset these challenges, but the pressures aren’t likely to let up over the next five years. 

“The number of seniors is growing currently, but I think the big population boom is still a few years away,” David Kaplan, director of corporate ratings at S&P, tells Senior Housing News. “We don’t see a source of new volume in the near term—at least, not enough to offset these pressures. I think that’s why you’re seeing some leave the industry.”

Beyond the effect of more patients in managed plans, typical Medicare reimbursement rates have also declined and pulled down margins for SNFs. The Centers for Medicare & Medicaid Services (CMS) rolled out the Multiple Procedure Reduction (MPPR) initiative, which reduced payments for multiple services provided on the same day—a common occurrence in SNFs with certain patients. 

As the greater heath care system shifts to value-based care (VBP), which values lower-cost care settings, SNFs are also frequently becoming a lesser choice.

“In some cases, [VBP] discourages providers from referring patients to a nursing home,” S&P Global Ratings finds.

Programs like bundled payment initiatives that tie reimbursements for hospitals to an entire episode—and cost—of care will likely encourage hospitals to reduce discharges to SNFs in favor of home health care.

In addition, SNF operators, like other health care providers, are dealing with increasing labor cost pressures, including a new overtime rule that goes into effect Dec. 1, 2016. 

Heightened Scrutiny

Beyond lower reimbursement rates and a changing patient mix, SNFs are under more scrutiny as a result of multiple investigations by the Department of Justice (DOJ) and settlements made by major SNF operators to settle allegations of improper payments. 

“The larger operators believe they tend to draw more attention from regulators and Medicare Administrative Contractors (MAC) and Recovery Audit Contractors (RAC) auditors (who perform audits on behalf of Medicare), given their scale and financial wherewithal and the financial incentives of these third-party auditors,” the report reads.

Because larger operators and owners are more susceptible to Medicare litigation, smaller, regional SNF operators have an advantage in the current conditions. 

“When Medicare wants to see who is not following the guidelines, they tend to go after the biggest [players] first,” says Kaplan. “When we think of the advantages of being larger, [we think of] the economies of scale, being able to spread out costs across multiple sites. That’s being outweighed because of the challenges of being large, in terms of litigation and being a target for Medicare. The smaller players have the advantage now. That’s unusual.”

Most notably, HCR ManorCare was charged by the DOJ for allegedly providing medically unreasonable and unnecessary services to Medicare patients. The issue is still ongoing. Another major post-acute care provider, Genesis Healthcare (NYSE: GEN), struck a $52.7 million settlement with the DOJ to resolve allegation of improper billing practices. 

Furthermore, SNFs may soon be open to more liability, after a new rule was introduced to eliminate arbitration agreements with prospective skilled nursing residents. In early November, a federal court ruling said Medicare-certified long-term care providers can continue to use arbitration agreements, but the outcome is ongoing. 

Fortunately, the headwinds aren’t likely to upset the entire industry. 

“We certainly don’t think the industry is shutting down,” Kaplan says. “It’s still critical to society, for millions of patients who need a place to recuperate. The industry is not going to fall apart. The pressures do extend broadly to the industry, but it’s not going to shrink by leaps and bounds.”

Written by Amy Baxter

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