FMG Industry Analysis: What is the NEW NORMAL for Skilled Nursing Facilities (SNFs)?
SNFs have experienced a tremendous amount of stress and pressure as the country moved through the 2020 and 2021 Covid-19 impacts. The number of news articles showing pictures of family members standing outside windows peering into their family member’s room at a SNF have been heartbreaking. The stories coming out of some states regarding the number of nursing home deaths tied to Covid-19 have reached the top headline slot for newspapers and internet news sources.
Even with these stresses, SNFs provide a needed care option for many patients and their families and must continue to be available to the community. According to the Centers for Disease Control and Prevention (“CDC”) the United States entered the pandemic period with 1.4 million patients occupying licensed beds out of the approximately 1.7 million licensed bed supply. On average 79% of the beds are occupied every day, with patients receiving four hours of nursing care per day.
The Provider Relief Fund provided needed liquidity resources to many SNF operators as they dealt with the patient care, staffing, supply chain, and other issues experienced as a result of Covid-19. In May of 2020, Health and Human Services (“HSS”) began distributing $4.9 billion dollars to nursing homes with six or more certified beds on a fixed ($50,000 per facility) and variable ($2,500 per certified bed) basis. The facilities were required to promise to use the funds for permissible purposes. In September of 2020, an additional $2.5 billion was announced to help SNFs deal with upfront Covid-19 expenses such as testing, staffing and personal protective equipment (“PPE”) needs. SNFs did not have to apply for this funding, as it was provided by HHS based on data submissions previously provided to HHS.
Now as the country is moving forward, it is time to assess the overall impacts of Covid-19 on the SNF industry. This includes future performance forecasting and evaluating opportunities to improve performance or take advantage of rising trends.
New Normal Trends
The existence of a NEW NORMAL is real. Irrespective of industry or individual company, there are new normal impacts resulting from Covid-19, such as the WFH movement. Specific to SNFs, let’s explore a few trends that are emerging as a New Normal.
Is the trend to Home Health Care (“HHC”) increasing in speed? Some industry leaders believe the trend to home based health care will continue over the long term, but may reverse slightly as the Covid-19 fears dissipate. Other industry leaders believe the trend to home health care will continue, fueled by the potential cost savings for in-home service delivery and ongoing fear of disease transmission at congregant facilities.
How will SNFs change? As a result of Covid-19 and the increased visibility of nursing home centers, there has been a trend toward more private rooms and amenities. This is fueled by a desire to develop a more “at home” feeling facility to encourage families to place their loved ones with a specific SNF. There has also been a trend to more family involvement in patient care. More transparency of information via web portals such as PruittHealth’s “My PruittHealth”, which will contain patient temperature, blood oxygen, etc. reporting, is being implemented. The desirability of a specific facility will be, at least in part, measured by transparency of patient information and the quality of the facilities.
Will a specific SNF survive? As with many sectors, the impact of the pandemic highlighted and widened the gap between solid operators and weaker operators. REITs that finance SNF fixed assets and operating capital lenders alike initially expected severe problems, but found the Provider Relief Fund monies helped the SNFs survive. Now as that money may dry up or be reduced, the financial performance of the individual SNF takes on more importance.
Clinical capabilities, the quality of the facility, and the quality of the communication with patients and their families, coupled with the ties to referral sources will continue to be important when assessing which facilities have the higher probability of future success.
The key measurements always used to identify performance winners and losers remain important. However, the ability to separate Provider Relief Fund / CARES Act impacts from Covid-19 specific impacts from normal performance decision making is going to be a key factor in evaluating the performance of an individual SNF.
The trend toward HHS reducing reimbursements for physical and occupational therapy, and speech language pathology services needs to be considered in evaluation of future performance. Staying abreast of HHS decision making and rate structures will be of significant importance as SNFs work through the next year.
The use of Provider Relief Fund monies will need to be evaluated for potential repayment or hold back issues.
As the financial performance of a SNF is reviewed, it will be important to accomplish the following:
-Evaluate the 2019 and 2020 financial performance and the 2021 forecast using a separation of:
CARES Act / Provider Relief Fund impacts,
Covid-19 specific impacts,
Management and operating decisions pre and post pandemic.
We consider this approach peeling back the onion. And it is a necessary approach to evaluating the performance of SNFs and evaluating the performance of the REITs that finance the fixed assets.
It is the combination of operating performance (from the income statement), working capital management (income statement and balance sheet) and leverage (balance sheet), coupled with the impact of Covid-19 impacts and Provider Relief Fund impacts, on performance and financial reporting, that will help readers of financial statements understand the performance and leverage risk moving through 2021 and beyond.
Contact us to assist in evaluating the performance of SNFs or REITs in the SNF space, using this approach.
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In case you missed it, these are the previous topics covered in our Focus Management Group Industry Analysis series:
Part 1: Crop Farming
Part 2: Property Management & Real Estate
Part 3: Restaurants