Private Equity-Owned SNFs

November 24, 2021, Ben Swett, The SeniorCare Investor - Here we go again.  According to a new study published by JAMA Health Forum, private equity-owned nursing homes are not cutting it compared to those nursing homes owned by other for-profits.  In addition, PE-owned homes were more likely to have an acute coronary syndrome ER visit and more likely to have a resulting hospitalization.  In addition, total Medicare costs (revenues) were higher.  This needs some context. 

First of all, the size of the PE-owned group was just over 3% (300+ facilities) of the size of the larger for-profit group, so a pretty small group.  Second, most PE firms, after a skilled nursing acquisition (and usually a portfolio) do try to change things to increase the profits and cash flow, and thus their return.  If they didn’t, they probably would not make their investors very happy. 

The usual way to do this is to target more Medicare patients, and higher-acuity post-acute patients.  As the acuity increases, it is more likely there will be medical complications.  These often result in ER visits and hospital admissions.  They would like to prevent that from happening, because it is not exactly great for future referrals from local hospitals and physicians.  And let’s not forget, many of these patients likely have other co-morbidities that can contribute to another acute episode. 

The spending increase on Medicare is simply.  If you are trying to increase your Medicare census, your Medicare revenues (costs to Medicare) will go up.  That is simple math.  If you are taking patients from other SNFs, there is a net-zero effect on costs to the system.  If you are taking patients that maybe would have stayed longer in the hospital, or gone to an LTAC, you are maybe lowering system-wide costs, even though your Medicare revenues are increasing.  

We are also sure there is some cost cutting that goes on after an acquisition, but in today’s world, we just don’t see a lot of fat on the bone of a SNF deal, especially on the labor front, where many SNFs are a bit short on staff to begin with.  Back-office efficiencies and better reimbursement coding are usually the most likely areas to exploit.  This is not to say that all PE firms are boy scouts when it comes to how they manage their skilled nursing facilities, or, more accurately, how they talk to the operators about managing the facilities and changes to make.  

One always has to keep in mind that if care suffers under PE ownership, it should impact the exit valuation, so there is little incentive to have that happen.  The one exception is if they have already taken out their equity (and plus some) with a refinance, they can then get a little looser when it comes to operations.  This usually involves the sale of the real estate as a first step.