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With our focus on healthcare services, healthcare IT and life sciences, we offer innovative and original perspectives to leaders throughout the industry.

New Rules for Skilled Nursing But No Revenue Relief

May 3, 2022 - Banker Commentary by Taaha Shaikh

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As other sectors of the economy and the healthcare ecosystem continue their recovery from the height of the COVID-19 pandemic, the skilled nursing industry has seen continued stress. The sector suffers from chronic understaffing and underinvestment in capital plant despite being a critical pressure valve for the greater healthcare ecosystem during the pandemic. The recent proposal by the Department of Health and Human Services in concert with the Centers for Medicare & Medicaid to increase federal oversight of the skilled nursing industry has served to crystalize some of the issues that continue to trouble the sector. If the pandemic put a spotlight on the industry’s biggest issues, then the new regulations serve to drive the point home. The additional regulations will undoubtedly increase operating costs without any offset in reimbursement.

The policies proposed by DHHS and CMS are aimed at reforming the skilled nursing sector. The most significant of these policies, given the current market environment, is the imposition of minimum staffing requirements. Staffing requirements at or above current levels pose a unique challenge to the industry, potentially endangering already anemic revenue streams at a time when staffing is the top concern. A recent study by the Kaiser Family Foundation found that, as of March 2022, approximately 28% of all skilled nursing facilities reported staffing shortages. Staff turnover has compounded through the pandemic despite the critical role that skilled nursing facilities have played in the pandemic response. A recent study produced by the American Health Care Association found that the skilled nursing sector continues to lose workers with another 2,500 leaving the sector through March 2022, bringing the total to over 241,000 workers lost since the onset of the pandemic.

Looking beyond staffing issues, the proposed reforms by DHHS and CMS seek to increase federal oversight of the sector. CMS is seeking a 25% increase to its budget for health and safety inspections. Further, the reforms also seek to increase the current maximum fines levied against nursing homes. Each of these proposals risks increasing operating costs across the sector. Notably missing from the package of reforms is any changes to the primary reimbursement mechanisms – Medicare and Medicaid.

At a time when substantial additional strategic investment is needed to improve the fractured skilled nursing industry, the proposed reforms have the potential to drive away investors and new entrants. Further, the reforms do not adequately address the chronic labor shortages faced by the skilled nursing industry. Providing additional funding to providers alongside the reforms would be an important first step toward reshaping an industry that remains critical to the healthcare ecosystem.

Additional funding would also help to improve the credit strength of many skilled nursing providers. With the Federal Reserve’s interest rate hikes, the low-cost long-term capital of previous years has seen a marked jump in price. Investor appetite has also waned as major buyers weigh the timing and full impact of the Fed’s actions against the broader economy. However, even in the current turbulent capital markets environment, we continue to see good investor interest for strong healthcare credits. Improving the credit strength of skilled nursing providers alongside increased oversight could provide a rare opportunity to reform this critical healthcare subsector.

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