SNF Industry Update

Every year, the accounting firm of Clifton Larson Allen (CLA) produces an industry trends report based on accumulated cost report data. The report provides a good snapshot of the nursing home industry, nationwide, with insights on regions and states.  The report is available here: 38th-snf-cost-comparison-and-industry-trends-report

As I’ve written on numerous posts on this site, the SNF industry is facing exceptional headwinds post COVID 19. The pandemic did a lot to expose the structural regulatory and funding weaknesses SNFs have faced for decades.

• Aging physical plants
• Inadequate reimbursement levels, particularly via Medicaid
• Increasing regulatory pressure and related costs
• Increasing Medicare Advantage clientele with lower reimbursement and shorter stays
• Labor shortages and rising labor costs
• Inflation sensitivity for supplies
• Litigation and rising liability insurance costs
• Of late, rising costs of capital and restricted access to capital

With a recent proposed staffing mandate, the headwinds for the industry just ratcheted-up a notch (if the proposed rule remains as is without significant change).  More mandates/regulation without additional funding will no doubt, produce additional facility closures.

Some key takeaways from the CLA report are,

• Margin levels, though predominantly negative as of late, are very much a factor of location, age of physical plant, and payer mix.  The greater the Medicaid mix, the weaker the margin.
• Location impacts operating costs.  As costs are trending higher, principally labor, than reimbursement increases, more expensive markets hurt performance.
• Prior to the pandemic, margins were around zero.  Public Health Emergency funding provided some relief.  That funding has ended yet, pandemic impacts in terms of census/occupancy, costs, and reductions in workforce (necessitating the use of contract labor) have not.
• Margin performance is a function of reimbursement and location (costs).  Certain states definitely create more opportunity for positive operating results.

• The ratio of expense increase to revenue is higher and somewhat faster.  The primary driver is nursing labor costs. Total nursing average hourly wages increased 14.7% in 2022, compared to increasing 8.8% in 2021 and 7.4% in 2020. Nursing contract labor hours as a percentage of total nursing hours increased to 10.2% in 2022, compared to 5.3% in 2021, and only 2.9% in 2020.
• Medicare Advantage plan penetration varies significantly.  Upper Midwest states (WI, MI, MN) have the high penetration as does Florida, and Oregon (above 50%).  Medicare Advantage lengths of stay tend to be about 60% shorter than traditional Medicare lengths of stay.
• Occupancy levels (median) pre-COVID were at 85%, post-COVID the median has shifted to 80%.  While there is some labor savings when occupancy levels decrease, the loss of revenue is as impactful if not more toward margin.  Per the American Health Care Association, 579 SNFs have closed since the beginning of the pandemic.

While the picture is fairly gloom, there is reason to have some optimism.  SNF care is in-demand and because of demographic strength (increases particularly in the 80 plus cohort), demand will not wane anytime soon.  Further, Medicare Advantage enrollment increases present opportunities for facilities to partner and work on increasing calls/demand for value-based programs (bundles, disease focused programs, etc.).  There also is additional room in many market areas for I-SNP and C-SNP programs.

• Growth is primarily an opportunity for smaller facilities (under 100 beds), private beds, newer physical plant.
• Growth will be most available for facilities in favorable labor market areas.
• Providers with high start ratings (4 and above) already perform better and have more opportunity to develop value-based care programs and partnerships.
• Providers that are a part of systems, CCRCs, have hospital affiliations, have strategic home health partners, have more opportunity than free-standing facilities.

As markets contract and facilities become fewer, the separation effect will become evident.  Those facilities that have solid staffing, minimal debt, up-to-date physical plants, high quality ratings, and a payer mix with minimal Medicaid residents/patients should be able to weather the choppy seas that are likely to remain, for a few more years.  Heck, facilities positioned properly, may find the next few years to be filled with growth (and increasing margin) opportunity.