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Medicaid Reform: Hope for Taming the Gorilla?

A few weeks back, I wrote a piece regarding Medicaid and its ties to the fortunes (lack thereof ) of some the largest SNF provider groups. Today a high percentage of resident census connected to Medicaid as a payer source is the largest contributor to the flagging financial condition of Genesis, HCR/ManorCare, Signature, and others.  With large losses stemming from inadequate Medicaid payments and shrinking sources of offset via Medicare (for a number of reasons), these organizations are perilously close to bankruptcy (or are fundamentally there as is the case with HCR/ManorCare).  For reference, see the previous post at

As I talk with investors across the nation (and internationally in some cases) interested in the fortunes of the REITs that hold a ton of the Genesis, HCR/ManorCare,, assets (buildings) and or the fortunes of the companies themselves (Genesis is publicly traded with a stock value current, hovering just above $1 per share), I field the same question(s) repeatedly.  How did we get here and what needs to change for these companies to survive, or can they?  Quickly, allow me to recap where the SNF industry and particularly the groups aforementioned and others like them, is at.

  • First and most crippling, their dominant payer source is Medicaid. In the case of Genesis and HCR/ManorCare, above 66% on average in each SNF.
  • Medicare Advantage is a growing piece of the Medicare payer equation. In some markets, Medicare Advantage plans account for more than 50% of the Medicare patient days in a SNF referral stream.  These payers (the Advantage plans) are paying at Medicare MINUS levels.  Medicare minus 10% is phenomenal, if attainable. In most markets the discount is greater.
  • Most markets have a surplus of available SNF beds (nationally too).  Competition among providers is fierce for quality mix (better payers).  Because of this, the Advantage plans do not (yet) need to negotiate favorable terms as someone, somewhere will accept the discount; preferable to the vacant bed.
  • The policy landscape is adjusting to a new reality in which Stars matter.  Higher rated (Five Star) providers are now favored by payers, providers and consumers alike.  The steerage has started and it won’t subside.   Hospitals to physicians to consumer groups and payers preference is toward providers rated 4 Stars or higher.  While this pressure is yet overt, its subtle and growing and I hear it constantly as hospitals for example, won’t abide readmission risk and if they are in bundled or other at-risk payment projects (physicians too), they seek better partners (quality ratings) to handle their referrals.
  • There is a distinct preference shift among physicians, consumers and payers (bundled for example as well Medicare Advantage) to minimize inpatient stays both by length or by necessity.  Certain orthopedic profiles that once were a SNF staple (joint replacements) good for a 20 plus day Part A stay at high therapy RUGs either don’t last 20 days or don’t get referred at all.  I am seeing a wholesale shift of these patients to home health and outpatient primarily, followed by short (demanded) stays, 40 to 50% fewer in days, on an inpatient basis.  This volume change has demonstrably hurt certain SNF provides formerly reliant on it to offset Medicaid losses.
  • The physical plant assets are old, oversized, and dated.  The new, successful SNF model is smaller buildings, all private rooms, nicely appointed.  Genesis,, represent some of the largest and oldest plant assets in the industry.  They are inefficient, institutional, and in many cases, burdened by high rent payments and comparably, high levels of deferred upkeep and maintenance (particularly interiors and movable equipment). Wholesale renovation is impractical as the investment is greater than the return on assets attainable now and across the near-horizon.
  • The regulations, especially the newly updated Federal Conditions of Participation for SNFs, phasing in as I write, are crippling to these providers.  These new regulations are coming with increasing cost while reimbursement options are flat to decreasing (Missouri and Kansas just had Medicaid rate cuts).  The Medicare increase for FY 2018 is 1%.  These new regulations require in some cases, wholesale changes to how SNFs operate when it comes to analyzing staffing needs, resident preferences, food and cultural issues, etc., all concurrent to REDUCTIONS in Medicaid rates.

So, to the point of this piece and the question that bears: What needs to change with respect to Medicaid to abate the problems present?  Secondarily, is there a survival/revival scenario for Genesis, Signature, HCR,  I’ll answer the second question first as the first, is harder to sort through.

  • The business model of Genesis, Signature, etc. today is misaligned to the industry revenue/payer and market incentives.  There simply is no quick fix to repurpose the assets and to change the quality ratings and payer-mix, to make many of the facilities viable.
  • Their fixed costs are too high in terms of rent payments.  The REITs have a valuation problem as their books hold an asset today at a value that is by all definitions, impaired.  The valuation is based on cash flow which simply, in terms of rent payments, is no longer attainable.  Think about it: Rent coverage levels below 1 aren’t sufficient today to keep payments current.   A few articles back on this site, I wrote a piece regarding “Stranded Assets”.  This covers these concepts in-depth:
  • Supply exceeds demand in many markets in terms of bed capacity.  Current SNF occupancy runs in the 85 to 88% range in most markets.  This today, is net of beds removed from service in many states to avoid paying (additional) bed tax or getting hit with Medicaid rate reductions and a loss of bed-hold payments for failure to meet occupancy levels (typically 90 plus percent).

The answer: Survival as is not likely and the industry needs to re-base again in terms of valuations, operators and capacity.  The underlying forces that took us to this current paradigm will not shift soon enough or demonstrably favorable (revenue/income), to alter the course for these providers.  I offer that this period is analogous in the incentive changes to the arrival of PPS for the industry in the early 90s.  Rebasing occurred as cost-rate payments disappeared and the rewards tied to “spending” more changed.  During this time, seven of the top 10 SNF organizations went bankrupt, some never to return to publicly traded status.

Turning to the 800 pound gorilla or Medicaid.  Medicaid reform is a significant challenge and without something changing from its present course for SNFs, the fortune for the SNF industry and this payer source is below bleak or grim.  For Medicaid as a payer, SNF care is a small portion of the overall outlay and actually shrinking as other programmatic expansions have consumed growing amounts of resources (Medicaid expansion).  The program drivers are primary physician and hospital care. The primary users of Medicaid today are working poor and their ranks are growing – rural and urban.   As applicable to seniors, Medicaid-waiver benefits have expanded at a far greater rate than SNF care utilization (which has continued to decrease).  Waiver programs, popular for keeping seniors out of institutional settings, have expanded as the needs of an aging society have expanded.

Medicaid is funded principally, by States attaining various levels of revenue, allocating the same toward a Federal funding approach that matches the revenue, and then forwards the Federal share to the state.  As the Feds choose to incent certain Medicaid programmatic initiatives, the Feds may sweeten the pot with enhanced matching dollars or a full (initial ) funding approach such as under Medicaid Expansion.  The flaw in any of these approaches is the temporary nature of the Federal cash subsidy and the limitations imposed to the State that prohibit the State from cutting the outlays conditioned on the Federal incentive.  In other words, the Vegas slot machine effect (just enough payoff to keep you seated and pumping-in dollars anticipating a bigger payoff).  States get hooked and the resort they have to curtailing or balancing their piece of the Medicaid pie (once the Federal piece shrinks) are raising revenue (typically very tough through income taxes hence the bed tax games, tobacco tax games, and the inter-fund related robbery that goes on state to state among schools, highways, gasoline taxes, casino funds, etc.) or cutting provider payments.  It is the latter that has hurt the SNF industry by reference, in this article.

Medicaid in its current form is a broken system and one that was bastardized to break with the ACA.  Expansion hastened its demise, though it was on life support when the ACA was passed and implemented.  It has become a catch-all basket of anything entitlement, non-Medicare and as a result, it is a mess.  The sad reality is every policy analyst with any cred knows it as does all of the House, the Senate, and everyone at DHHS.  The difficulty is how does something like this get fixed.  The prevailing answer: Punt it back to the states and give them flexibility to “innovate” otherwise known as, the Block Grant approach.  Instead, as I conclude this piece with others sure to follow, consider the following.

  • For an SNF, Medicaid is a rate drag – a loser producing daily revenue shortfalls to cost.  It’s not that the rate may be inadequate its that the costs are too high.  The point here is that without wholesale federal regulatory relief from rules and requirements that haven’t shown any evidence of producing better care outcomes, their is no opportunity to reform Medicaid as a payer adequate enough in rate, for a SNF to survive with a majority Medicaid census.  Simple economics apply: Either rate rises to offset cost increases or costs decrease to allow rate to be adequate to produce and sustain, product quality.  The gap between regulatory increases and overreach and rate inadequacy (Medicaid and to a lesser extent, Medicare) is widening.
  • Block grants won’t work as the whole pie is the reference point rather than the programmatic pieces.  Trust me, the parts of Medicaid have considerably different contextual differences and economic and social drivers.  Funding must be de-aggregated and reimagined at the different levels, separately.  The needs of children, families, etc. are so markedly different from the SNF and waiver needs of the elderly as are the economic and social drivers.  Market strategies can and likely will work with the younger groups whereas the elderly, need a social construct (ala Pace approach) model to achieve investment and outcome balance.
  • The benefits need review and re-think.  This is true however, of all federal entitlements.  Here, states given latitude may have some significant advantage in revamping Medicaid.  The Feds, in a Block Grant approach must be the “bank” or the “capital” not also the architect, general contractor, and job-site superintendent.
  • The Medicaid incentives need reversing and a growing emphasis on private initiatives and insurance needs to occur.  The Feds can play an active role by creating avenues for private investment for retirement, accumulation of capital, use of estate and wealth transfer resources, etc. such that over time, the obligations of government to fund large pieces of the social fabric and needs of old age care, shift more in-balance, to each citizen.  The return on investment of tax advantaged, flexible investing for private insurance, private wealth accumulation used for care and service needs after 65, etc. is far greater (positive) than the loss of or revenue offset of the tax advantage.  We know this to be true via HSAs and 401(k)s and IRAs.
  • Finally, reforming health care will reform (significant step forward) Medicaid and the drivers of cost.  Fixing Medicaid is not a stand-alone issue, so to speak.  The challenge in the U.S. today is to REFORM health care, not reform how it is paid for or who has coverage and how does one access the same.  Spending on health care in the U.S. is disproportionately higher than all other world nations and our return in terms of life expectancy and QUALYs, substandard.  We are investing a $1 and losing 20 or so cents on our investment.  We need to focus on “bending the cost-curve” and not the insurance and welfare/entitlement pieces.  Regulatory reform and streamlining payment and program participation would be a great, simple first-step.




September 14, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

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, 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:

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.


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