The coming year will be “a bit of a slog” for skilled nursing, but operating and financial headwinds should ease over the course of 2023.
That’s the viewpoint of Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), which owns 270 skilled nursing and transitional care properties, along with senior living, behavioral health and other types of assets.
“We’ll continue to see occupancy improve, and labor slowly, slowly get better,” Matros told Skilled Nursing News. “So, we do think it’ll be better than ‘22; we think by the end of ‘23, we will be pretty close to pre-Covid occupancy levels — close enough that everybody will feel comfortable, particularly from an investor perspective, that the industry is recovering.”
Leaders with LTC Properties (NYSE: LTC), a real estate investment trust that owns 78 skilled nursing facilities and other health care properties, struck a more circumspect tone with regard to occupancy gains.
The long-term care side of the industry has been enduring a “painfully slow census recovery,” and with average occupancies remaining about 800 basis points below historical norms, the “viability of the business model” is under stress without government support, LTC Co-President and CFO Pam Kessler told SNN.
But Matros, Kessler and LTC Co-President and Chief Investment Officer Clint Malin all agreed that skilled nursing providers have opportunities to strengthen their businesses in 2023, particularly by embracing high-acuity care.
Matros and the LTC leaders also shared their perspectives on the outlook for the M&A markets in the year ahead, and the potential effects of a slowing economy and rising interest rates.
Rising acuity: burden vs. opportunity
Acuity has been rising in skilled nursing, and providers recently spoke to SNN about the “very heavy burden” of caring for people with more intensive needs while in the midst of a staffing shortage.
But the REIT leaders pointed out that rising acuity also is creating some of the biggest opportunities in 2023, for operators that can rise to the moment.
Payment changes related to nursing categories in the Patient-Driven Payment Model (PDPM) created rewards for skilled nursing operators that offer higher-acuity care, Matros pointed out. Those higher payment rates could support increased wages, which should help attract the staff needed to deliver the necessary care.
More advanced clinicians also are attracted to higher-acuity settings, which offer more chances for them to “test their skills,” Matros said.
“If I was still an operator, that’s how I’d do it — I’m going to push acuity as high as it can go and capture that reimbursement so I can pay nurses more money,” he said. “I think that’s really the only option; otherwise, I think you’re just sort of sitting still.”
Within Sabra’s portfolio, Ensign Corp. (Nasdaq: ENSG) is one operator exploring this type of model. Ensign recently took over operations of some former North American Health Services buildings, where the skilled mix is higher than typical for Ensign.
Ensign is considering translating the higher-acuity North American model to other markets, Matros said.
Kessler likewise emphasized the opportunity for SNFs in higher-acuity care.
“On the opportunity side … we believe for those operators who are able to adapt their business model to demonstrate quality outcomes for a high volume of higher acuity, clinically complex patient populations, referrals from hospitals and health care networks should increase, leading to an increase in overall census,” she said.
LTC’s Malin described a “fundamental shift in the skilled nursing industry” that has been unfolding for several years, separating operators that are focused on higher acuity, short-term stays and operators focused on Medicaid-reimbursed long-term care. The REIT has focused on providers serving the higher-acuity rehab population, such as Ignite Medical Resorts and PruittHealth.
In 2023, LTC remains bullish on those types of SNF investments, Malin said.
Part of the value prop lies in the continued expansion of value-based care, Malin and Kessler said. That is, if SNFs can deliver quality outcomes for patients who historically might have been in the higher-cost hospital setting, they will be in a strong position.
These top REIT executives are far from alone in seeing the merits of this strategy.
“Higher acuity residents and the move to value-based care/pricing models have made the focus [on clinical excellence] more critical,” Trilogy Health Services CEO Leigh Ann Barney told SNN recently, in offering her 2023 outlook. Among other steps, Trilogy has opened stroke rehabilitation and LVAD units and is considering further specialty offerings, such as neuro units.
And last fall, Covenant Care’s incoming CEO Nathan Ure described a strategy focused on increasing skilled mix.
‘Super painful’ labor situation
In 2023, labor will remain the biggest challenge for skilled nursing operators, the REIT leaders agreed.
“That is the primary pain point, and it’s super painful,” Matros said.
Still, there are reasons to believe that the pain could ease over the course of the year, particularly if the economy enters a recession, as some economists are predicting.
Matros anticipates a mild recession, which usually helps with regard to hiring pipelines and retention.
Malin also expects some benefits related to the economy, although not enough to create a dramatic rebound.
“Although a slowdown in the economy, layoffs and hiring freezes in other industries should benefit the skilled nursing sector, likely it will not be enough to offset the workforce losses the industry has experienced over the past three years, which were exacerbated by ‘Covid burnout’ among health care workers,” he said.
Still, any improvement with regard to labor will be welcomed by providers, and easing of inflation also should bring some relief.
“Inflationary pressures will probably ease more quickly than staffing pressure,” Kessler believes.
Matros also foresees financial upside in 2023. He is thankful that costs for Sabra’s operators have remained fairly stable outside of labor, and expects relief in the form of Medicaid and Medicare rate increases this year.
The Medicaid rates should reflect the effects of inflation as captured in cost reports, and the Medicare market basket increase should likewise account for inflation. The market basket increase in fall 2023 could be as high as 3%, in Matros’ opinion. And he noted that already in 2022, Medicaid bumps helped Sabra’s operators maintain strong revenue per patient day.
“I think we’ve been through the worst, but it’s still tough going out there,” he said. “I don’t want to make light of that.”
SNF investment and regulatory outlook
Rising interest rates also will have a bearing on the M&A markets in 2023.
“Given the sharp increase in the cost of debt over the past 12 months, coupled with a contraction in the lending market and the fact that skilled nursing operations have not yet returned to pre-pandemic profitability, we expect prices to decrease in 2023,” Kessler said.
But she noted that prices for SNFs might not drop as much as for other types of real estate, given the demographic tailwinds.
Matros believes it is “almost impossible to determine” pricing trends in skilled nursing, because dealmaking has been driven by private capital groups willing to pay high prices for SNF assets that support ancillary businesses.
These transactions may continue into 2023, he said, although they will “cool down” at some point.
However, he expects a “really light year” overall in terms of skilled nursing dealmaking, noting the slowdown in transactions that started in Q4 2022.
Matros also is concerned about the viability of the strategies driving some SNF investments by private capital, and supports efforts being undertaken by the Biden administration and federal lawmakers to increase nursing home ownership transparency, saying that the issue is “really important for us.”
The White House also is pushing for a federal staffing minimum for nursing homes. Matros does not believe that the staffing mandate will have legs in 2023.
This is in part because the House has narrowly flipped to Republican control, and also because of a “growing understanding” among federal officials that the necessary labor pool does not exist, and any minimum would need to be supported by greater funding.
Malin also pointed out these impediments to a mandate.
“Perhaps the federal government will work with the skilled nursing industry to provide government funded workforce recruitment and clinical training,” he said. “That would do far more to help with the staffing problem our industry faces than mandates.”
However the year unfolds from a regulatory, economic or operational standpoint, Kessler takes heart in what she has learned from decades of experience.
“The skilled nursing industry has continually adapted to changes and challenges over the past 20-plus years that we have been in the business,” she said. “It is an incredibly resilient industry, and we have no doubt it will continue to adapt and change to meet the challenges of the future.”