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Are SNF Operators Healthcare’s Sisyphus?
posted on Oct. 18, 2018


Headwinds Point Toward Increased Restructuring


Healthcare bankruptcy filings more than tripled in 2017, with notable bankruptcy filings among skilled nursing facilities (SNFs) such as HCR ManorCare, Orianna Health Systems, and 33 SNFs affiliated with Care Partners Management Group. Meanwhile, several large SNF portfolio deals have emerged in the merger and acquisition space in 2018, and more are expected to follow suit as changes in reimbursement and diminishing patient volumes continue to erode the sector.


Such activity points to the Sisyphean challenges SNF operators face in yielding a sustainable margin in today’s healthcare marketplace. It also highlights the intense difficulty SNFs have in demonstrating their worth in the healthcare continuum—especially aging facilities that are in dire need of infrastructure and technology upgrades.


Taking a Closer Look


Across the country, financial stressors have prompted increased restructuring activity in the SNF space, including:


  • A decline in occupancy rates, which fell to 81.6 percent in the first quarter of 2018; this decline is driven in part by a push by managed care plans to reduce length of stay or avoid SNF admissions entirely

  • Decreasing Medicare and Medicaid reimbursement

  • A decline in the use of SNFs as people live longer and seek alternatives to SNF care

  • The loss of referrals to competitors (13 percent per year, on average)

  • Continual challenges in retaining and recruiting highly skilled talent, as well as increased labor costs


Low reimbursement continually erodes bottom-line earnings for SNFs and is a primary concern for any SNF operator. For example, the Multiple Procedure Payment Reduction policy implemented by the Centers for Medicare & Medicaid Services (“CMS”) reduced the amount SNFs formerly were able to charge by offering multiple services to Medicare patients on the same day. Meanwhile, programs such as CMS’ Bundled Payments for Care Improvement initiative, which provides healthcare organizations with reimbursement for end-to-end episodic care, are likely to encourage hospitals to discharge patients to the lowest-cost setting, such as a home health unit, rather than a SNF. Even when health systems discharge to a skilled nursing setting, they often require that an operator achieve minimum star ratings from CMS. Operators can quickly be excluded from a health system network following a poor survey, which contributes to additional pressure on occupancy and profitability.


Further compounding these challenges is an influx of competitors attracted to the demographics of this space, such as “super SNFs,” or medical resort facilities that are reinventing post-acute care; the rise in regional and in-state buyers that may have an advantage with managed care organizations in a particular market; innovative alternatives to traditional skilled nursing facilities, such as small-house models; and new competitors that have focused on siphoning the short-term rehabilitation patients with Medicare and commercial payer sources from existing operators. That leaves existing operators with more long-term care residents, often reimbursed by Medicaid, and no ability to offset that tighter-margin business with the more profitable short-term rehabilitation residents.


In recent years, interesting trends have taken shape, including discussion among industry experts about the next iteration of skilled nursing. This is a revamp of the existing business model, wherein SNFs repurpose and convert their functionally obsolescent facilities into assisted living facilities and memory care units. One such restructuring—or rather, transition—took place in late 2017, when Wisconsin-based Attic Angel Community, formerly a SNF operator, converted its 44-bed nursing home into an assisted living facility. The rationale for conversion was that the federal government considered allowing Medicare reimbursement for rehabilitation in assisted living facilities. The operator estimated it would generate annual savings of $90,000, primarily through avoidance of a bed tax, but also through a reduced administrative burden.


Another new development putting pressure on SNFs’ ability to maintain profitability is the influx of new beds across the nation. Commercial real estate investors are bullish on the new supply and view this asset class as highly opportunistic; most expect occupancy to rise in the long term through a surge in the population of aging baby boomers. This, too, has contributed to declining occupancy rates.


The combined impact of these forces has had the following impact on SNF operators:


Margin pressure: The median net operating margin dropped to 0.5 percent in 2016, with significant disparity between high- and low-performing facilities. With pending reimbursement changes associated with the implementation of CMS’ Patient-Driven Payment Model set to take effect next year and occupancy rates being affected by excess supply, SNFs are likely to grapple with profitability and solvency. This will compel operators to either restructure or transition to alternative long-term care models.


Inability to invest: While a surge in SNF demand from an aging baby boomer population is expected at some point, the current decline in occupancy rates and influx of beds in the SNF space mean commercial real estate investors must carefully weigh whether to invest in SNFs and under what circumstances.


“Borderline” or fraudulent practices: Scrutiny from the Department of Justice and other authorities impacts SNFs in a meaningful way and exerts additional cost pressures in the form of fines and other dispute settlement charges. Compared with other settings for long-term care, such as home health, skilled nursing operators are more regulated and subject to lawsuits in states without tort reform. In October 2016, Ohio-based Life Care Centers of America paid $145 million to settle allegations it submitted fraudulent claims to Medicare for unnecessary rehabilitation services. Another notable case was that against short-term post-acute care and long-term care provider HCR ManorCare, which in early 2015 was accused of similar actions.


Divestitures: With changes in reimbursement and diminishing patient volumes continue to erode the SNF sector, nationwide companies are seeking to divest their SNF assets to Real Estate Investment Trusts (“REITs”), private equity funds, or more stable operators. An increased number of transactions is expected in 2018. Some buyers may choose to lease facilities to experienced providers in this space.


Restructuring: All of these factors manifest in a loss of financial and time liquidity. A shrewd owner or operator with the right advisors may try to restructure its business, either out-of-court or via an insolvency proceeding such as a Chapter 11 filing. However, operators that wait too long to address the issue may run out of time and money, making a restructuring impossible.


For More Information


These situations are among the most difficult a healthcare organization can face. For more information, visit, or contact:



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Hammond Hanlon Camp LLC (“H2C”) is an independent strategic advisory and investment banking firm committed to providing superior advice as a trusted advisor to healthcare organizations and related companies throughout the United States. H2C’s professionals have a long track record of success in healthcare mergers and acquisitions, capital markets, real estate, and restructuring transactions, acting as lead advisors on hundreds of transactions representing billions of dollars in value. Hammond Hanlon Camp LLC offers securities through its wholly-owned subsidiary H2C Securities Inc., member FINRA/SIPC.  For more information, visit



Kelly T. Duong
Hammond Hanlon Camp LLC

Wayne P. Weitz

Managing Director

Hammond Hanlon Camp LLC

212 257 4531

Michael R. Lane

Managing Director

Hammond Hanlon Camp LLC

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