The skilled nursing facility industry has been dealt several successive blows in recent years, leaving many SNF owners with few options to keep struggling facilities afloat. As a result, SNF bankruptcy is becoming increasingly commonplace.
Financial Realities Lead to Tough Circumstances
The economic downturn seems to have impacted everyone, but a series of laws, amendments, and shifts in the market have been especially difficult for those in the skilled nursing industry. Here’s a brief list of what has occurred:
- 1997 – Balanced Budget Amendment Act allows states to mandate managed care plans for individuals wanting Medicaid coverage for nursing home services, resulting in extremely low negotiated reimbursement rates
- 1999 – Health Care Financing Administration changes Medicare reimbursement, almost immediately triggering a round of SNF bankruptcies
- 2008 – Economic downturn and official “bursting” of the housing bubble guts many retirement savings accounts, negates home equity, and makes selling a home difficult for seniors
- 2010 – Patient Protection and Affordable Care Act increases benefits for in-home care, reducing overall demand for SNFs and effectively ensuring that those who are in SNFs will be frailer and in need of more care
- 2011 – Centers for Medicare & Medicaid Services announced an 11.1% reduction in reimbursement rates, which was twice as bad as what had been predicted
- 2011 – As a direct result of this announcement, stock prices for publicly traded SNFs plummet
- 2012 – Medicare Payment Advisory Commission recommended an additional 4% cut in reimbursement to SNFs that will go into effect in 2014 and recommended no cost of living adjustment for 2013
Debt and expenses remains high among SNFs. This is particularly difficult to manage as the majority of unpaid Medicare co-payments are owned by state governments, and states lack the financial resources and the will to reimburse SNFs for the money owed. Some nursing home brokerage firms have been able to help clients buy a skilled nursing facility when it’s in distress, saving their clients money and helping the previous owners avoid a messy financial conclusion.
The Bankruptcy Process
When a skilled nursing facility is no longer financially solvent, bankruptcy may be the only route. Working with financial and legal experts, the SNF will choose between two types of bankruptcy: Chapter 7 (liquidation) and Chapter 11 (reorganization). With a Chapter 7 bankruptcy, a trustee is appointed to assess the company’s debts and assets and to collect and reduce property to raise cash, which is then distributed to those who are owed money. A trustee is also appointed to ensure patients are responsibly transferred before the SNF closes. In Chapter 11, the owner acts in lieu of a trustee, and works with a committee of creditors. They find ways to work with vendors and pay employees while continuing to operate, with the ultimate goal being to regain firm financial footing – usually by restructuring the business and selling off some of the company’s property.
Bankruptcy can provide an opportunity for those who plan to buy nursing homes. They may find a SNF for sale at a substantially reduced price, which can enable them to make improvements or operate in the black that much more quickly.