Skilled Nursing Facilities Bracing
for Another Tough Year
Could 2012 Be the Sequel to 1999 ‘Slasher?’
BY JEFFREY R. MANNING AND JERRY SHAPIRO
The year 1999 witnessed a rash of SNF bankruptcies following a major change in Medicare reimbursement
when the Healthcare Financing Administration began to transition to a prospective payment system for SNF
services. In the decade that followed, SNF operators experienced a period of relative stability, but it may
have been the proverbial calm before the storm. Seismic shifts in funding sources, the consequences of a
weakened economy from the Great Recession may soon produce another wave that could rock the industry.
JEFFREY R. MANNING
Practice, BDO Capital
Reminiscent of the Halloween movie plot where the villain comes back again and again, another major change in
Medicare reimbursement is battering skilled
nursing facilities (SNFs). The year 1999
witnessed a rash of SNF bankruptcies following
a major change in Medicare reimbursement
when the Healthcare Financing Administration
began to transition to a prospective payment
system for SNF services. The new system
paid fixed, pre-determined rates for each day
of care — a radical change from the former
system of cost-based reimbursement. In the
decade that followed, SNF operators experienced a period of relative
stability, but it may have been the proverbial calm before the storm.
Seismic shifts in funding sources, the consequences of a weakened
economy from the Great Recession and other environmental factors
may soon produce another wave that could rock the industry.
Reliance on State and Federal Government Insurance Programs
It is a common idiom inside the D.C. Beltway that the Center for
Medicare and Medicaid Services Administration (CMS) plays the
carnival “Whack-a-Mole” game with SNFs as one of the few ways to
slow increasing costs.
SNFs provide care for patients that require constant medical
attention, but do not require hospitalization. As Baby Boomers age,
the demand for services offered by SNFs will increase dramatically. Likewise, this demand will be exacerbated by the efforts of
managed care organizations to move patients out of hospital beds
and into lower intensity care settings when medically appropriate.
The demand for SNF services remains strong.
However, escalating healthcare costs and the pressures of a weak
economy have conspired to make fewer individuals able to afford
nursing home costs on their own. For about 85% of all SNF residents,
government programs pay all or part of their costs. Medicare, the
federally funded and operated health insurance program for quali-
fying individuals age 65 and older, accounts for about 12% of SNF
payments. Medicare only pays for the first 100 days in a skilled
nursing facility. Residents must then rely upon Medicaid after the first
100 days. Medicaid is a state-operated health insurance program
for disabled and low income individuals. Because Medicaid is partly
funded by the states, Medicaid reimbursement is often considered
more variable than Medicare. Medicaid accounts for approximately
half of nursing home payments. Together, Medicare and Medicaid
payments account for nearly two-thirds of all SNF payments.
This heavy reliance upon state and federal government-funded
insurance programs has left SNFs particularly vulnerable to the vagaries of government reimbursement policies.
Changes in Government Reimbursement
The economic downturn has created unprecedented budgetary pressures at the state and federal level.
On October 1, 2011, the CMS announced an 11.1% cut in federal
Medicare reimbursement rates. While SNFs were aware a cut was
coming, expectations were for a cut of about half of the actual reduction. This dramatic reduction in Medicare reimbursement translates
to a $79 billion reduction over ten years, severely cutting into profit
margins in an industry where profit margins are traditionally slim to
begin with. IBISworld estimates profit margins for SNFs to be around
3.3%. Publicly traded nursing facility companies collectively have
some of the lowest margins in the healthcare sector. Further reductions are certainly possible making the situation potentially far worse.
Industry stock prices plummeted on the news of the Medicare
reimbursement cut. Stocks of publicly traded nursing home companies fell by as much as 50% on the first day of trading after the slash
in reimbursement rates.
The recently announced cut in Medicare reimbursement for nursing
homes looms ominous for nursing home operators and businesses
dependent upon them. State governments also face staggering
deficits. During budget deficits, many states look to save money by
cutting Medicaid reimbursement, directly and immediately impacting
cash flow and income at SNFs.