Cutting into costs

A skilled nursing facility report from accounting firm CliftonLarsonAllen is a mixed bag of good and not-so-good news. On the plus side, payroll taxes dropped to 2010-2012 levels.
A skilled nursing facility report from accounting firm CliftonLarsonAllen is a mixed bag of good and not-so-good news. On the plus side, payroll taxes dropped to 2010-2012 levels.

These days, any exhaustive assessment of an industry's overall financial and operational health is invariably a mixed bag of good and not-so-good news. The 30th annual “Skilled Nursing Facility Cost Comparison Report” from CliftonLarsonAllen is no exception.

Overall, the report finds nursing homes have high levels of cash for short-term needs, slightly healthier net margins than four years ago, and are doing a little better managing their accounts receivables. It also notes that median liquidity has dipped, occupancy continues slipping and facility plants are aging.

Still, those CPAs' numbers alone do not necessarily add up to credit risks for most of the nation's nursing homes, as several leading bankers recently told McKnight's Long-Term Care News. In some ways, as McKnight's found after interviewing leading lenders, most are taking a more holistic approach in assessing SNFs' financial health, holding fistfuls of hard numbers in one hand and in the other, a mixture that includes two parts accounting expertise and one part gut feeling.

Key findings

The most recent CLA report is based on information culled from 2014 audited financial statements of about 450 nonprofit and for-profit nursing facility providers nationwide. Following are the changes in key financial and operational indicators since 2010.

The good news:

• Median days cash-on-hand increased from 36.2 days in 2010 to 45.7 days in 2014. 

• Days revenue in accounts receivable was down only slightly.

• Net margin ratios were up almost half a point.

• Earnings before interest, taxes, depreciation and amortization (EBITDA) were up slightly.

• The percentage of resident days covered by private and other payers increased slightly. (Caveat: The increase is due in part to the rise of managed care plans.)

• Payroll taxes and fringe benefit costs dropped to 2010-2012 levels.

The not-so-good news:

• Median liquidity (assets divided by liabilities) dropped half a percentage point since 2010.

• Operating margins, a profitability measure, were down almost half a point.

• Bad debt as a percentage of operating revenues was up only slightly.

• Long-term debt to equity was down only slightly.

• The average age of physical plants was up about one year since 2010.

• Occupancy percentages are down over a full point, attributable to shorter lengths of stay, alternative settings like home and community services and changes in hospital referral patterns.

The big picture

Some of the report's findings can be sobering, made even more stark when you consider the billions of dollars in private equity now swirling like a water spout in the non-SNF post-acute markets of independent and assisted living, continuing care retirement communities and memory care. As an Assisted Living Federation of America report early last year noted, 2015 marked the highest-ever level of private equity in this sector. And both independent and assisted living saw their strongest occupancy rates since 2007.

No analysis of key financial and operational indicators can be made without considering the shifting sands in which the skilled nursing industry now finds itself.

As the CLA report notes, federal deficit pressures are shining spotlights in competition, capital access and payment reform. Third-party government payments are being challenged, and preventable readmissions and chronic disease management threaten to place 2% of Medicare SNF payments at risk in less than two years.

Healthcare reform is now forcing new measures on performance like CMS-sponsored accountable care organizations, entities that manage care costs for specific populations and which numbered 405 as of August 2015, as well as new methods of reimbursement such as bundled payments and value-based purchasing.

Weeks after the CLA report, Genesis HealthCare, the country's largest skilled nursing provider, announced its plans to participate in the Medicare program's Bundled Payments for Care Improvement and the Medicare Shared Savings programs. The company said the move would better position it to respond to changing models of care and payment, and reflects a growing industry momentum toward value-based care.

“We all know we're going away from fee-for-service to a value-based environment, whether that takes the form of bundled payments, ACOs or capitation,” Michael Gehl, chief investment officer, Housing & Healthcare Finance, LLC, tells McKnight's. “The transition to a new payment paradigm could result in significant margin pressure. We all don't know what it's going to look like yet, but understanding these initiatives is critical to nursing home finances.”

Bankers' views 

While CLA report authors stress the indicators can help operators make strategic decisions concerning solvency, cost efficiencies, and profitability, they do note a few caveats. While the numbers can highlight areas of potential opportunity or challenges, spot trends and facilitate benchmarking, they should not necessarily be viewed in a vacuum.

The days cash-on-hand increase, for example, should probably be seen in the context of what has been a rather unusual time for long-term care, according to Beth Burnham Mace, chief economist, director of capital markets outreach, National Investment Center for the Seniors Housing & Care Industry.

“There were significant changes enacted during this time frame in the healthcare space,” Mace tells McKnight's. “The increase in this single measure, taken in and of itself, may suggest that skilled nursing facilities tried to be better prepared to handle unexpected cash drains that could be imposed upon them from a number of evolving social and medical trends.” Among them: the Affordable Care Act, and the evolving relationships being developed among ACOs and managed care organizations, hospitals and skilled nursing operators. “Health information technology and big data analytics also play a role as fee-for-service outcomes shift to value-based outcomes.”

Tracy Maziek, healthcare services managing director at Oxford Finance, believes the numbers should be viewed as signs of a reimbursement system in flux. The implications of the days cash-on-hand metric shows Maziek that there is both an “increased uncertainty with reimbursement and a possible lack of attractive investment alternatives.”

Jeffrey Gardner, senior vice president, BMO Harris, meanwhile, attributes the days cash-on-hand increase to part process improvement and “a growing caution in the face of reimbursement challenges, payment delays and rising care costs.”

Gehl tells McKnight's his overall assessment of the CLA report numbers point to a lull, perhaps even a calm, before the storm. 

“The industry is kind of treading water, kind of in a flat range in terms of performance,” he says. “Facilities are dealing with a lot of headwinds like managed care, shorter length of stay and the beginning of a transition to value-based care. At least on the expense side, we have not seen a ton of wage pressure, except in a few select markets that are more labor shortage driven more than anything.”

Meanwhile, Erik Howard, managing director, real estate finance capital funding at Capital Funding LLC, tells McKnight's that even if the days cash-on-hand metric had gone south, it's not necessarily a red flag to lenders. 

“That's because skilled nursing facilities have unique challenges,” he says. “Perhaps a better indicator would be how a majority of the operators in the industry manage their cash positions vis-à-vis their working capital lines of credit.”

Adds Jeffrey Stein, executive managing director of Capital Finance LLC, the healthcare working capital arm of Capital Funding Group: “In skilled nursing, depending on which state you are operating in, you are billing and collecting Medicaid on different frequencies. Some states you bill once per month and in others it can be twice a month or weekly with a similar reimbursement frequency. Obviously, operators with a more frequent billing and reimbursement cycle will be in a better liquidity position.”

Popular metrics

For obvious reasons, bankers gauge the credit-worthiness of nursing homes in different ways than certified public accountants do.

Which begs the question: What ways do lenders measure risk other than a facility's liquidity?

As Mace notes, “The days cash-on-hand is but one of many measures used to gauge an organization's financial prowess. There are a number of other important operational, liquidity and balance sheet metrics that gauge the overall financial health of an organization as well.”

Maziek also prefers to consider occupancy and payer mix. “A traditional Medicaid shop is going to have much lower bed turnover and thus more predictable cash cycle than a facility that specializes in transitional care beds covered by Medicare,” he says. “Margins are much lower but predictable in this sector, so facilities, in my opinion, are more likely to run with less days cash.”

He also looks “very closely” at EBITDA and EBITDAR [which adds rent and restructuring costs as a metric] margins. “The ability of an operator to meet its obligations is 100 percent driven along those data points, as well as collectability and accounts receivable,” he adds. 

Gehl says he approaches his decisions like a real estate lender and is also a strong believer in EBITDAR margins when deciding on a provider's creditworthiness, starting with a baseline of between 12% and 14% as a positive sign of cash flow with adjustments based on quality mix and state reimbursement levels. He also looks “where the census is. Some states are obviously different than others,” he adds. “Typically where there is Certificate of Need occupancy in the mid-80 percent range, sometimes in the 90's, and a Medicare census in the 13% range.” Other balance sheet items he considers are credit line access, day sales outstanding (DSO) as that demonstrates “how quickly they can get those receivables and turn them into dollars.”

Lenders like Mark O'Brien, executive vice president, business development and underwriting, Gemino Healthcare Finance, say their borrowers are more likely than not to be operators with significantly less days cash-on-hand than the average skilled nursing facility, adding, “Our clients typically include the smaller for-profit operators who are undercapitalized and live on small margins.” And so, O'Brien said the metric he often prefers is how well facilities manage their accounts receivables — “a better indicator to a working capital lender that the facility is operating efficiently and there are not deeper, underlying problems going on.”

Gardner also prefers not to target days cash-on-hand when making lending decisions, focusing instead on such quantitative things as profitability, access to credit lines, ownership, signs of insufficient liquidity, stretched payables, deferred capital expenditures, repeated overdrafts, leverage ratios, occupancy trends, EBITDA margins, survey results and collateral coverage, and qualitative measures like curb appeal, site visits, reputation with referral sources and other providers.

Payer mix is among the key measures Stein eyes. 

“If you have a primarily Medicaid facility, any drop in your census is going to really hurt because a nursing home has to have a good payer mix, because if you're strictly Medicaid, you're not going to make money,” he adds.

Being patient and sensitive to external regulatory demands also comes into play when it comes to accounts receivable days. “There are payment delays in many states, and with all the ACO programs being introduced, it takes them a while to work out all the kinks and it's the operator who suffers,” he adds. Stein notes providers in Illinois sometimes had to wait six months to get paid by the state,” he notes. 

“That's why it's so crucial for nursing homes in Illinois to have a solid working capital line of credit,” he says.