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Senior and Post-Acute Healthcare News and Topics

SNFs and Stranded Assets

Lately I’ve written rather extensively on what is occurring in the SNF sector to (rather) dramatically shift the fortunes for companies such as HCR/ManorCare, Kindred, Genesis, Signature, et.al. and a series of REITs that hold SNF assets (physical).  In addition to my writings, I’ve consulted/conversed with numerous investment firms concerned and interested in this shift.  Underlying all of my written thoughts and my discussions is a harsh reality check: A solid third of the industry today (SNF) has assets that I and other industry-watchers would consider/define as stranded.

I have embedded a link to a great article that covers the concept of “stranded assets”.  It is from the HFMA and the focus is on hospitals but the issues are directly analogous to SNF physical plants.  The link is here: http://www.hfma.org/Content.aspx?id=54453

The underlying issues that created this unique asset status are as follows.

  • An SNF physical plant has value if the corresponding cash flow generated from the operations attached to the asset is positive with a margin.  The HFMA hospital reference point is an EBITDA margin of 6% or higher.  Depending on the age of physical plant, deferred maintenance and interest and tax costs, 6% is likely a “non-coverage” situation.  For SNFs owned by REITs, we are seeing EBITDAR equal to a coverage ratio of 1 or less (cash to pay or cover rent costs).  I contend that in this scenario, the asset (SNF) plant is now stranded.
  • Stranded effectively means that the asset (the SNF) has no strategic or business value in the current state (with an EBITDAR coverage equal to 1 or less).  Without significant changes to operations to increase the cash coverage margin, the value of the asset is impaired and by GAAP, should be written down.  NOTE: I am not an accountant/CPA so I will leave any further reasoning or discussion on GAAP requirements, asset impairment and write-downs to the accountancy profession.
  • Important to note about assets/SNFs that are stranded is that short-term advances/improvements in their cash flow may change this status by definition but the same is only temporary.  The market, health policy and other  business shifts away from certain types of institutional care and lower-rated providers is permanent.  SNFs not properly positioned from an asset and operating perspective for these market changes will return to stranded status again and rather quickly.  The point here is this: An asset that is stranded is characterized by,
    • An aged physical plant with deferred maintenance
    • A plant that is not current in terms of market expectations (private rooms, open dining, bistro areas, coffee bars, exercise and therapy gyms, etc.)
    • A plant that is inefficient from a staff and resource perspective (too many units, too spread out, etc.)
    • An asset with operations that have a poor history of compliance, rated below 3 stars, and with marginal to sub-par quality measures.

Today, the strategic value of the asset is tied directly to its ability, along with paired operations, to generate positive cash margins sufficient to cover debt payments or lease payments plus required capital improvements (funded or sequentially incurred period over period). If an asset is truly stranded, changing that position is a strategic and long-term endeavor: An approach that requires wholesale repositioning.  For many SNFs, this approach may not be feasible.

  • The dollars required to reposition the asset from a physical plant perspective are greater in total than the remaining Undepreciated Replacement Value of the plant.  In other words, the cost to reposition is greater than the value of the asset.
  • The return generated from the repositioning is insufficient from an ROI perspective (less than the cost of capital plus the imputed life-cycle cost of depreciation of the improvements).
  • The operations of the asset are also impaired such that the compliance history and Star ratings, etc. are poor (historically) and changing the same would/will require a long-term horizon whereby, the same does not net cash flow improvement during the process.  Referrals and permanent cash-flow improvements are the result of revenue model changes and the same can not occur overnight when Star ratings and compliance improvements are required.  Changing Star ratings from a 3 to 4 for example, can take twelve months or longer.

The take-away points for the industry are simple.  The industry has an abundance of buildings/assets that fit the stranded definition today and a good number reside in REIT portfolios.  These assets/buildings, because of the points above, literally and figuratively, cannot be repositioned.  Their value has shrunk precipitously and there is nothing regarding the circumstances that caused this shift that will change.  Repositioning to avoid or change the stranded status is improbable due to the facts at-hand;

  • The asset is old by current business-need standards, has moderate to significant deferred maintenance issues and improvement to the current standard will cost in-excess of the undepreciated replacement value of the asset.
  • The operations tied to the asset are not highly rated, with strong compliance history and exceptional quality measure performance.
  • The operations and asset together, are incorrectly matched within a market that has higher rated competitors with better outcomes and newer, better positioned physical plants.  The preferred referrals for quality payers has moved to these competitors and the drivers such as bundled payments, value-based purchasing, Medicare Advantage plans, etc., plus a movement away from institutional care (to shorter stays, fewer stays) has altered the demand factors within the market.

In all probability, the above foreshadows a shrinking scenario combined with a valuation-shift (negative) for the SNF industry.

 

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June 21, 2017 Posted by | Skilled Nursing | , , , , , , , , , , , | 2 Comments

SNF Fortunes, HCR/Manor Care and Salient Lessons in Health Care

Long title – actually shortened.  In honesty, I clipped it back from: SNF Fortunes, HCR/Manor Care, Five Star, Value-Based Payment, Hospitals Impacted Too, Home Health and Hospice Fortunes Rise, and all Other Salient Lessons for/in Health Care Today. Suffice to say, lots going on but almost all in the category of “should have seen it coming”.  For readers and followers of my site and my articles and presentations/speeches, etc., this theme of what is changing and why as well as the implications for the post-acute and general healthcare industry has been discussed in-depth.  Below is a short list (not exhaustive) of other articles I have written, etc. that might provide a good preface/background for this post.

Maybe a better title for this post is the question (abbreviated) that I am fielding daily (sometimes thrice): “What the Heck is Going On?” The answer that I give to investors, operators, analysts, policy folks, trade association folks, industry watchers, etc. is as follows (in no particular order) HCR/Manor Care: This could just as easily be Kindred or Signature or Genesis or Skilled Healthcare Group…and may very well be in the not too distant future.  It is, any group of facilities, regardless of affiliation, that have been/are reliant on a significant Medicare (fee for service) census, typified by a large Rehab RUG percentage at the Ultra High or Very High level with stable to longer lengths of stay to counterbalance a Medicaid census component that is around 50% of total occupancy.  The Medicaid component of census of course, generates negative margins offset by the Medicare margins.  For this group or sub-set of facilities in the SNF industry, a number of factors have piled-on, changing their fortune.

  • Medicaid rates have stayed stable or shrunk or state to state conversions to Managed Medicaid have slowed payments, added bureaucracy, impacted cash flows, etc.  This latter element in some states, has been cataclysmic (Kansas for example).
  • Managed Medicare has (aka Medicare Advantage plans) increased in terms of market share, shrinking the fee-for-service numbers.  These plans flat-out pay less and dictate which facilities patients use via network contracts.  They also dictate length of stay.  In some markets such as the Milwaukee (WI) metro market, almost 50% of the Medicare volume SNFs get is patients in a Medicare Advantage plan.
  • Value-Based Care/Impact Act/Care Coordination has descended along with bundled payments in and across every major metropolitan market in the U.S. (location of 80 plus percent of all SNFs).  This phenomenon/policy reality is dictating the referral markets, requiring hospitals to shift their volumes to SNFs that rate 4 Stars or higher. The risk of losing funds due to readmissions, etc. is too great and thus, hospitals are referring their volumes to preferred environments – those with the best ratings.  The typical HCR/Manor Care facility is 3 stars or less in most markets.
  •  Overall, institutional use of inpatient stays is declining, particularly for post-acute stays.  Non-complicated surgical procedures or straight-forward procedures (hip and knee replacements, certain cardiac procedures, other orthopedic, etc.) are being done either outpatient or with short inpatient hospital stays and then sent home – with home health or with continuing care scheduled in an outpatient setting.  Medicare Advantage has driven this trend somewhat but in general, the trend is also part of an ongoing cultural and expectation shift.  Patients simply prefer to be at home and the Home Health industry has upped its game accordingly.

Adding all of these factors together the picture is complete.  Summed up: Too much Medicaid, an overall reduction in Medicare volume, an overall reduction in length of stay, and a shift in the referral dynamics due to market forces and policy trends that are rewarding only the facilities with high Star ratings.  That is/will be the epitaph for Manor Care, Signature, etc.

Five Star/Value-Based Care Models, Etc.: While many operators and trade associations will say that the Five Star system is flawed (it is because it is government), doesn’t tell the full story, etc., it is the system that is out there.  And while it is flawed in many ways, it is still uniformly objective and its measures apply uniformly to all providers in the industry (flaws and all).  Today, it is being used to differentiate the players in any industry segment and in ways, many providers fail to realize.  For example, consumers are becoming more savvy and consumer based web-sites are referencing the Five Star ratings as a means for comparison.  Similarly, these same consumer sites are using QM (quality measure) data to illustrate decision-making options for prospective residents.  Medicare Advantage plans are using the Five Star system.  Hospitals and their discharge functions use them.  Narrow networks of providers such as ACOs are using them during and after formation.  Banks and lenders use the system today and I am now seeing insurance companies start to use the ratings as part of underwriting for risk pricing (premiums).  Summed up: Ratings are the harbinger of the future (and the present to a large extent) as a direct result of pay-for-performance and an ongoing shift to payments based on episodes of care and via or connected to, value-based care models (bundled payments, etc.).  Providers that are not rated 4 and 5 stars will see (or are seeing) their referrals change “negatively”.

Home Health and Hospice: The same set of policy and market dynamics that are adversely (for the most part) impacting institutional providers such as SNFs and hospitals is giving rise to the value of home health and hospice.  Both are cheaper and both fit the emerging paradigm of patients wanting options and the same being “home” options.  Hospice may be the most interesting player going forward.  I am starting to see a gentle trend toward hospices becoming extremely creative in their approach to developing non-hospice specific, delivery alternatives.  For example, disease management programs evolving within the home health realm focused on palliative models, including pain and symptom management.  Shifts away for payment specific to providers ala fee-for-service will/should be a boon for hospices.  The more payment systems switch to episode payments, bundled or other, the more opportunity there is for hospices to play in a broader environment, one that embraces their expertise, if they choose to become creative.  Without question, the move toward less institutional care, shorter stays, etc. will give rise to the home care (HHA and hospice) and outpatient segments of the industry.  As fee-for-service slowly dies and payments are less specific (post-acute) to place of care (institutional biased and located), these segments will flourish.

Hospitals Too: The shift to quality providers receiving the best payer mix and volume and payments based on episodes of care, etc. is impacting hospitals too.  This recent Modern Healthcare article highlights a Dallas hospital that is closing as a result of these market and policy dynamics: http://www.modernhealthcare.com/article/20170605/NEWS/170609952?utm_source=modernhealthcare&utm_medium=email&utm_content=20170605-NEWS-170609952&utm_campaign=dose

REITs, Valuations, M&A, and the Investment World: As we have seen with HCR/Manor Care and Signature (likely others soon), REITs that hold significant numbers of these SNF assets have a problem.  These companies (SNF) can no longer make their lease payments.  Renegotiation is an option but in the case of Signature, the coverage levels are already at 1 (EBITDAR is 1 to the lease obligation).  IF and I should say when, the cash pressure mounts just a bit more, the coverage levels will need to fall below 1.  This significantly impacts the REITs earnings AND changes the valuation profile of the assets held.  What is occurring is their portfolio values are being “crammed” down and the Return on Assets negatively impacted.  And for the more troubling news: there is no fluid market today to offload underperforming SNF assets.  Most of the Manor Care portfolio, like the Genesis and Skilled Healthcare and Kindred portfolios, is facilities that are;

  • Older assets – average age of plant greater than 20 years and facilities that were built, 40 years or more ago.  These assets are very institutional, large buildings, some with three and four bed wards, not enough private rooms and even when converted to all private rooms, with occupancy greater than 80 or so beds with still, very inefficient environments.  Because so few of these assets have had major investments over the years and the cash flow from them is nearing negative, their value is negligible.  There are not buyers for these assets or operators today that wish to take over leases within troubled buildings with high Medicaid, low and shrinking Medicare, compliance (negative) history, etc.  Finally, the cost to retrofit these buildings to the new paradigm is so heavy that the Return on Investment (improved cash earnings) is negative.
  • Three Star rated or less with fairly significant compliance challenges in terms of survey history.  Star ratings are not easy to raise especially if the drag is due to survey/compliance history.  This Star (survey) is based on a three-year history.  Raising it just one Star level may take two to three survey cycles (today that is 24 to 36 months).  In that time, the market has settled again and referral patterns concretized – away from the lower rated providers.
  • In the case of Manor Care, too many remain or are embroiled or subject to Federal Fraud investigations.  While no one building is typically (or at all) the center of the issue, the overhang of a Federal investigation based on billing or care impropriety negatively impacts all facilities in terms of reputation, position, etc.

As “deal” volumes have shrunk, valuations on SNF assets are getting funky (very technical term).  The deals that are being done today are for high quality assets with good cash flow, newer buildings or even speculative deals on buildings with no cash flow (developer built) but brand-new buildings in good market locations.  These deals are purchase and operations (lease to operators and/or purchased for owner operation).  Cap rates on these deals are solid and range in the 10 to 12 area.  Virtually all other deals for lesser assets, etc. have dried up.

Final Words/Lessons Learned (or for some, Learning the Hard Way): As I have written and said ad nausea, the fee-for-service world is ending and won’t return.  Maximizing revenue via a focal opportunity to expand census by a payer source, disconnected from quality or services required, is a defunct, extinct strategy. That writing was on the wall years ago.  Today is all about efficient, shorter inpatient stay, care coordination, management of outcomes and resources and quality.  The only value provider assets have is if they can or are, corollary to these metrics.  By this I mean, an SNF that is Five Stars with modern assets and a good location within a strong market has value as does the operator of the asset.  An SNF that is Two Stars with an older building, a history of compliance problems, regardless of location, 50 percent Medicaid occupied has virtually no value today…or in the future.  Providers that can network or have an integrated continuum (all of the post-acute pieces) are winning and will win, especially if the pieces are highly rated.  Moreover, providers that can demonstrate high degrees of patient satisfaction, low readmission rates, great outcomes and shorter lengths of stay are and will be prized.  The world today is about tangible, measurable outcomes tied to cost and quality.  There is no point of return or going back.  And here’s the biggest lesson: The train has already left the station so for many, getting on is nearly impossible.

June 14, 2017 Posted by | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment