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.

Happy New Year from LTC Consulting Services!

Happy New Year from LTC Consulting Services!

 

 

Transcript:

2018 was a whirlwind of a year.

There was so much going on and we helped so many clients this year that the memories are just amazing.

We’ve had clients that have been just spinning their wheels without making any headway at all.

And then there were some who found themselves stuck in a hole and they needed our help to get pulled out.

Would you try winging it on your own? Or attempt getting away cheap?

This year, don’t settle for mediocrity. Rather, trust the pros at LTC.

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.