A Steal or a Bad Deal? 5 Pitfalls to Avoid in Skilled Nursing Facility Acquisitions

A Steal or a Bad Deal? 5 Pitfalls to Avoid in Skilled Nursing Facility Acquisitions

By Steve Zicherman, CPA
Managing Partner, LTC Finance and Advisory Services

Consider this scenario: A skilled nursing facility (SNF) is on the market, and you’re interested. If you’re a seasoned nursing home administrator ready to move into an ownership role, a successful SNF owner interested in expanding your portfolio, or an entrepreneur seeking investment opportunities, you’ve taken steps to minimize the risk. After a careful review of the historical financials and some number-crunching, you’re certain that with diligent attention to increasing the census and cutting expenses, you can project a healthy profit in year one. So now it’s time to trust your intuition and move quickly to capitalize on the opportunity, right?

Not so fast. After more than a decade on the front lines of SNF acquisitions, we’ve learned why some acquisitions succeed while others struggle to realize their goals. Here are some key points:

  1. Numbers don’t lie?

Those historical financials paint a pretty picture of a nice little “fixer upper” that just needs some TLC. Sure, the margins have tended to be slim, but with some decent marketing and ancillary contract trimming, this facility has real potential.

Or does it? Don’t let the numbers they provide be the only story you see. Unfortunately, there’s plenty of creative accounting in SNF operations that can mask or minimize significant issues. Add a few strategic management or corporate allocations here and there, and a money pit looks like a reasonably manageable turnaround candidate with great prospects. It will take robust, skeptical due diligence during the underwriting process to break through the façade and reveal the truth.

  1. Projections: Live with them, don’t die by them.

In pursuit of lower rates on those critical terms and A/R loans, ambitious plans to slash expenses in the first year will certainly impress lenders. But you can count on unexpected challenges, and daily operations will almost certainly be a distraction from your turnaround strategy.

Don’t get tripped up! Setting projections that will make the bank happy while still being practical and achievable is an art form. Close coordination with your mergers and acquisitions advisor before closing can help you set realistic covenants and ratios, and it can also assist you in negotiating terms that will satisfy all parties and ensure uninterrupted cash flow.

  1. Got the loans! Great—but that’s not enough.

Planning for your strong A/R line of credit to cover your startup costs? Even the most generous lenders don’t want to be on the hook for more than 60 to 75 percent of total A/R, after factoring in collectability and advance rates. It’s easy to overestimate the collectability of your receivables, and your projected profitability may be months out. Are you ready to meet the shortfall?

Bottom line: A realistic cash flow projection will help ensure smooth operations until revenue stabilizes.

  1. I know! I can work with the vendors…

Maybe you’ll find some breathing room on the AP side. But remember—you’re the new kid. Your track record isn’t established yet, and your leverage is limited. Squeeze vendors too hard and they’ll terminate, leaving operations in turmoil and investors heading for the exits. That’s a recipe for disaster.

Strike the right balance. Your advisor can provide realistic strategies for astute management of AP, and tough negotiations with suppliers can deliver significant results if handled with care.

  1. Cut staffing for sure-fire savings?

The payroll looks pretty bloated on paper. It’s a classic strategy: cut your way to profitability. Trim some nursing positions here, pay a few department heads less there, get rid of deadwood—and bingo, hundreds of thousands in savings. Works every time, right?

Actually, there are many obstacles to this approach. This is a people business, and that overpaid supervisor who’s been here forever could be the heart and soul of the operation. New ownership makes everyone nervous, and if morale crashes, hundreds of disgruntled employees may suddenly decide to shop their resumes around. There are plenty of opportunities in the current highly competitive labor market, and new minimum wage rates in many states will make new hires significantly more expensive. Good luck replacing them without significant onboarding and incentive costs. And what will high turnover do to your facility’s reputation?

What’s more—this is a highly regulated industry. State-mandated staffing ratios need to be maintained if you want to survive past the first survey. Star ratings, Medicaid reimbursement, and simple resident satisfaction are all directly related to both staffing ratios and costs.

There are savings to be had, but cuts must be made with a razor, not an ax. An accurate staffing analysis can provide a cost-effective solution to optimum staffing.

Bottom line:

There are great acquisition opportunities out there, ready to outperform under good management. Making sure you get one of them is a challenge, and an experienced M&A team on your side can make all the difference.

Centers for Medicare & Medicaid Services to Cut Payments to Skilled Nursing Facilities

Centers for Medicare & Medicaid Services to Cut Payments to Skilled Nursing Facilities

The Protecting Access to Medicare Act of 2014 established a Value-Based Purchasing (VBP) Program for skilled nursing facilities (SNFs). SNFs were required to start reporting hospital readmission rates and other performance data to the Centers for Medicare & Medicaid Services (CMS) in October 2017. CMS is rewarding or penalizing nursing facilities based on this data, which has resulted in payment cuts in a majority of cases.

What Is the Skilled Nursing Facility Value-Based Purchasing Program?

The purpose of the SNF VBP Program is to focus on rewarding nursing facilities that offer better care to patients with Medicare. Here’s how it works:

  • SNFs are evaluated for unnecessary hospital readmissions within 30 days of a patient’s discharge
  • SNFs receive an individual performance score and a comparison performance score based on how other SNFs in the country perform
  • SNFs receive confidential quarterly and annual reports disclosing their performance scores
  • SNFs receive reimbursement incentives or penalties according to their performance scores

By focusing on reducing unnecessary readmissions, CMS has moved toward incentivizing the quality, rather than the quantity, of care that SNFs deliver. This is critical when you consider data cited by The Hospitalist. In 2010, 23.5 percent of patients who were discharged from the hospital to a nursing facility were readmitted to the hospital within 30 days, costing over $10,000 per admission or $4.34 billion per year. Astoundingly, 78 percent of these readmissions were considered avoidable.

Results of the VBP Program’s First Year

Since the penalties and rewards of the VBP Program are divvied out once per year, and the program started one year ago, the results are now in.

First, under the VBP Program, SNFs automatically lose 2 percent of their Medicare reimbursements, which they can earn back by reducing their hospital readmission rates. 60 percent of the withheld funds will be redistributed to the top-performing SNFs as bonuses.

According to Skilled Nursing News, 73 percent of SNFs were unable to earn their Medicare reimbursements back by keeping readmissions below a certain threshold. This means that nearly 11,000 of the 15,000 facilities that reported sufficient data are being penalized.

CMS used a formula to rank the nation’s nursing homes and determine each one’s incentive payment multiplier. The 73 percent of NSFs with a multiplier of less than 1.0 will receive reduced Medicare payments. Consider these examples:

  • A multiplier of 0.98 or less results in a payment reduction of 2 percent (meaning CMS withholds 2 percent and rewards a 0 percent incentive payback)
  • A multiplier of 0.99 results in a payment reduction of 1 percent (meaning CMS withholds 2 percent and rewards a 1 percent incentive payback)

The remaining 27 percent of SNFs with a multiplier of 1.0 or above will not be penalized or will receive a bonus payment from CMS. For instance:

  • A multiplier of 1.0 results in a payment reduction of 0 percent (meaning CMS withholds 2 percent and rewards a 2 percent incentive payback)
  • A multiplier of 1.01 results in a payment increase of 1 percent (meaning CMS withholds 2 percent and rewards a 3 percent incentive payback)

The highest multipliers awarded by CMS were around 1.016, earned by the 440 top-ranked facilities in the country. The lowest multipliers were about 0.98.

Get Help Figuring Out Your Finances

If your facility is among the 73 percent of SNFs affected by the Medicare payment cuts, LTC can help you figure out your finances and keep your facility running smoothly. We’re accustomed to pivoting and adapting as the healthcare industry changes, and we help our clients do the same.

To learn more about LTC and our financial advisory services, please contact us today.

Long-Term Care Statistics You Need to Know in 2018

Long-Term Care Statistics You Need to Know in 2018

If you operate a nursing home or other long-term care facility in the United States, your primary concern is to care for your senior residents and their families. However, finances are the lifeline of your facility, so you need adequate revenue to pay the bills and still make a profit at the end of the day. Consider these long-term care statistics that relate to your business.

  • 52 percent of people—47 percent of men and 58 percent of women—who reach age 65 will need long-term care in their lifetime.
  • 10 percent of Americans over age 65 have Alzheimer’s disease. This increases to 33 percent among people ages 85 and older. Two-thirds of Americans with Alzheimer’s are women.
  • The average length of time spent in long-term care is two years (2.5 years for women and 1.5 years for men). Only 14 percent of people need long-term care for five years or more.
  • As the US population ages, the number of people needing long-term care is on the rise. As a result, long-term care expenditures skyrocketed from $30 billion in 2000 to $225 billion in 2015.
  • The median yearly cost for weekday adult day care is $18,200.
  • The median yearly cost for assisted living care is $45,000.
  • The median yearly cost for nursing home care is nearly $86,000 for a semi-private room and over $97,000 for a private room. These figures vary significantly by location. For instance, the average yearly cost for a private room in a nursing home in Monroe, LA is under $52,000, while in Manhattan, NY, it’s over $215,000.
  • The median household wealth for adults over age 65 with no disabilities is just over $263,000. As for those with physical or mental limitations, the median household wealth is $94,200.
  • Unpaid family members and friends provide 83 percent of all long-term care in America, and two-thirds of older adults rely exclusively on free care. The estimated economic value of this unpaid care is $470 billion per year.
  • 65 percent of unpaid long-term caregivers are female, and 25 percent of them are in the “sandwich generation,” meaning they provide care for their aging parents, as well as their children. Another 34 percent are over age 65 themselves.
  • Medicaid provides care for 62 percent of nursing home residents, which covers 51 percent of all long-term care costs. 20 percent of Medicaid’s total funding goes toward paying long-term care, which is expected to increase by 50 percent between 2016 and 2026.
  • In 2000, 125 insurers offered standalone long-term care insurance policies. As of 2014, fewer than 15 do. Also, only 20 percent of businesses with 10 employees or more offer long-term care policies to their workers. Still, the number of people with long-term care insurance has increased from 4.5 million in 2000 to 7.25 million in 2014.
  • 14 percent of long-term care applicants ages 50 to 59 are denied coverage due to health issues. 45 percent of applicants ages 70 to 79 are denied.

With mounting costs, an aging population, and an increasing need for quality, affordable long-term care, you may struggle to manage it all. LTC Consulting can help you cut costs and navigate Medicaid and Medicare reimbursements to boost company profits. With us in your corner, you can focus on providing the best possible care for your senior residents while we oversee every financial aspect with great care and accuracy.

To learn more about LTC Consulting’s health care management services, please contact us today.