New Analysis of U.S. SNF Sector: Margins, Access to Capital Reaching Critical Condition

One-Third of SNF Providers at Zero Total Margins or Net Loss – Even Before Sequestration Impact

Washington, DC – A new analysis of the U.S. skilled nursing facility sector’s (SNF) total margin performance and access to capital finds the nation’s second largest health facility employer struggling under the growing weight of ever-lower profitability, tighter access to capital, a constriction of Medicare and Medicaid payment rates, and an overall environment that may place the sector’s ongoing viability in question.

Significantly, the analysis finds SNFs’ median net income margin (from all payors) was nearly cut in half between 2010 and 2012 to 0.99%, and one-third of the operators sampled had a zero total margin or net loss – even before the onset of sequestration cuts.

The report, by Lambert van der Walde, of van der Walde & Co., details a rapidly deteriorating SNF economic climate, and helps make clear the sector will be unable under current trends to make the key infrastructure investments necessary to treat increasingly older, higher acuity patients. In explaining the importance of examining industry profit margins, van der Walde observes, “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.”

“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 for Quality Nursing Home Care (AQNHC), which funded the study.

“Mr. van der Walde’s experience as Capital Markets Advisor to the CMS Administrator in both the Bush and Obama Administrations, combined with his Wall Street investment banking background, allows for the type of objective, financial analysis that makes this study invaluable to understanding the nexus between SNF providers, the investment community, and health care policymakers,” Rosenbloom stated.

In addition to the general finding that SNF providers are facing trends toward low profitability and limited access to capital, the report also details that:

• While interest rates are back down to levels seen before the 2008 financial crisis, SNF sector capital is expensive and is generally limited to certain types of debt financing;
• The debt market has priced significantly higher risk into SNF bonds due to government payment risk – raising borrowing costs;
• Real estate cap rates for SNF assets are roughly two percentage points worse than they are for senior housing assets;
• The cost of public equity capital has risen since the end of the financial crisis and is considerably more volatile than the broader market.

The report states: “Over the last decade, the SNF sector has faced great challenges and turmoil and has often struggled to maintain stable and sufficient profit margins. This has been caused by various factors, including the rapid increase in health care costs, ever-larger demands by a growing health care system, competition from other post-acute care providers, and policy changes and pressures from government payors (the federal Medicare program and state-run Medicaid programs).”

The former Obama and Bush Administration official also noted, “Current margin pressures are likely to be exacerbated by sequestration of federal funds from the Medicare program in 2013 and beyond. Access to capital is likely to be further challenged by uncertainty among investors and lenders regarding long-term government payment policies as health reform is implemented and the federal budget faces unyielding demographic and fiscal realities.”

The report continues: “When financial pressure of this degree is placed on SNF operators, they are forced to reduce expenses (largely labor) and to curtail investment in technology and the renovation or replacement of facilities and equipment. If these economic trends continue their current trajectory, stresses elsewhere in the system may emerge, such as the ability for acute care hospitals to discharge higher-acuity patients to SNFs.”

Concluded Rosenbloom: “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.

While this study outlines the financial stresses associated with existing government payment policies, it is our hope these findings will sustain the focus on devising a more forward-looking, rational Medicare post acute payment system to replace the status quo of more cuts, more pressure on staffing, and the resulting greater threat to elderly patients.”

Methodology Notes

This analysis draws upon financial data provided directly from members of the Alliance for Quality Nursing Home Care for 2010, 2011, and 2012. Because they are large, multi-facility chains, members of the Alliance do not necessarily represent the financial performance of the overall skilled nursing facility sector. These companies benefit from the economies of their larger scale and are able to spread certain costs of operating, financing, and investing over a larger, centrally managed, and diversified enterprise. This is to say that extrapolating the performance of Alliance members to the rest of the sector could be misleading. This also means that if the Alliance membership is struggling from a financial perspective, it is quite likely that the rest of the sector, on average, is struggling at least as much, and possibly even more.

Also, it is important to note that this analysis does not reflect the fact that payment from Medicare, which tends to be the most profitable payor for skilled nursing, is being reduced by 2% starting in 2013 due to the sequestration. The margins calculated in this report differ from those calculated by the Medicare Payment Advisory Commission (MedPAC). MedPAC’s objective is to determine Medicare payment adequacy so it purposely looks at Medicare payment data developed using Medicare cost reporting accounting standards. This report examines SNF results for all payors combined using Generally Accepted Accounting Principles (GAAP).

Margin Performance and Access to Capital Analysis >>