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Skilled Nursing & Hospitals Hold Hands, a Win-Win Relationship

The Skilled Nursing and Rehabilitation market is in the midst of a transformation and faces a new world of accountability and readmission penalties.  There is a long overdue interest and awareness that nursing home providers provide the key that can reduce unnecessary hospitalizations which trigger financial penalties for both the Skilled Nursing provider and the Hospital.  With the realization that private and public payers are committed to VALUE BASED HEALTH CARE, the days are over when financial success was tied to the census of a hospital or a skilled nursing facility.  

THE HOLDING HANDS RELATIONSHIP is new and demands cooperation from both hospital and skilled nursing provider.  Both share the goal of avoiding unnecessary inpatient stays, but a hospital’s facility, protocols and standards are very different from those of a SNF.  Furthermore, the communication gap between the two providers is great.  Nursing homes frequently do not receive the information they need to properly care for patients discharged from the Hospital.  Although there are many programs that address the problems of the marriage of Hospital and Skilled Nursing Facilities, the financial incentive to change to valued based health in the short term view, is not as important to a skilled nursing provider as it is for the hospital.   Cut in reimbursement rates for readmission are significant for hospitals, not for all skilled nursing facilities yet, but the handwriting is on the wall.

THE GOOD NEWS IS the skilled nursing provider doesn’t get off the hook, which is a tribute to the fact that the healthcare industry is “growing up” and adjusting to the demands of the culture.  For example, a good many health systems are creating a network of SNF’s that agree to meet quality standards, share data, provide certain services and work with hospitals to reduce, avoidable hospitalizations.  Upon discharge from a hospital, a patient is given the list of approved skilled nursing facilities that have met the Hospitals requirements and are included in their network.  Of course the patient can choose any nursing facility, but hospitals can help patients make good choices.  If a skilled nursing facility becomes a preferred provider they enjoy increased census and increased revenue.  In the long term when unnecessary hospital readmission from nursing homes reduces their reimbursement rate, the skilled nursing will survive that has developed a value based health care plan.  The ones that do not meet the new higher standards will not survive or end up in the bankruptcy court.

AND SO THE BEAT GOES ON!  The result of all the effort by various organizations like the Medicare-Medicaid Coordination Office and the Center for Medicare and Medicaid Innovation is resulting in the   integration of hospital and acute care providers.  The result is lower costs and improvement in the quality of care.  The entire healthcare industry is becoming more sophisticated and in the big picture is making giant steps in achieving what is necessary to create a structure that will support the goals of Value based care as well as financial reward.

Factors Leading to Skilled Nursing Facility Bankruptcies

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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.