hand placing Medicaid puzzle piece

Stagnant Medicaid rates aren’t just putting operators faced with outsized staffing costs into the red; in some places, they may be limiting access to the very capital providers need to sustain daily operations and pursue the kinds of improvements being pushed by federal regulators.

State reimbursement for nursing home care is a key factor in the underwriting process. Some providers and lending experts say its weight has grown in recent months, with federal COVID-era support waning and costs skyrocketing. In areas that have passed minimal rate increases — or none at all —  it may be difficult to obtain a loan needed for physical improvements or skilled nursing purchases.

One provider recently said the practice has risen to redlining in some places.

“You can talk to investment bankers and REITS: They’ve kind of put a red line on certain states, Connecticut being one of them,” Chris Wright, president and CEO of iCare Health Network, told McKnight’s Long-Term Care News last month. “If the reimbursement is not adequate or if the regulation is too stringent, there’s just no rate of return or potential upside.”

Wright has seen deals collapse over the Medicaid issue, despite the fact that state leaders in Connecticut have passed some direct care wage pass-throughs using Medicaid dollars.

Don Husi, managing director and co-lead of Ziegler’s seniors housing and care finance practice, said he hasn’t seen outright redlining. Still, he acknowledged that underwriters are undoubtedly taking a closer look at state reimbursement rates and local costs of business as interest rates rise and inflation soars.

He said the process remains “deal-by-deal,” but states with recent Medicaid hikes are likely to get a more favorable look from lenders.

“Florida just passed an (hourly pay) increase to their Medicaid rate, so people are liking the state of Florida and there’s a fair amount of interest in FL,” Husi noted.  “Alabama? Eh, not so much. Texas? Eh, not so much. Mississippi, eh, not so much? Ohio? Decent state, but they do need an increase so there’s some discussion there.

“It is very state-specific. Minnesota has always had good Medicaid reimbursement, but even there you’re seeing some disruption,” he added.

Cash flow is king

Alec Blanc, managing director and a founding partner of Monarch Advisors, spent 30 years in commercial banking before his brokerage role. He says Medicaid pressures on loan availability aren’t necessarily new, but they are compounded in the current environment.

“I don’t like to use the term redlining, but there have always been certain lenders who don’t want to lend in certain states because of rates or speed of payment,” Blanc said. “Most lenders in the skilled nursing space will underwrite to fully approved rate increases, although they would be reluctant to give credit to a temporary hike.”

Lenders, like buyers, are trying to determine the sustainable level of cash flow a property can produce. Upward rates help, but a given state’s history of poor reimbursement levels or recent inactivity hurts values and lending, he added.

A new twist in the current labor market is states that have hiked rates but tied the increases to specific spending categories, such as direct care staffing, or capped profits as in New York. While federal regulators have praised such efforts, owners and investors say they could potentially make lenders more leary.

“It could be a meaningful distinction, but it’s too early yet for the market to have a discernible opinion,” Blanc said. “As a former lender, I think I would say all rate increases are good rate increases but a direct wage pass through may be less good if it limits the operators’ ability or incentive to find operational efficiencies.”

States ‘have to be held accountable’

Flexibility remains critical for many providers as they face unprecedented expenses.

Wright’s 12 facilities serve a large Medicaid population — over 90% in April — and maintain 4- and 5-star ratings. But as both an owner and an AHCA board member, Wright is concerned about access to capital and potential limits on the growth of successful, quality providers.

Without state and federal funding commitments that accompany reform measures, providers will be hard pressed to continue investing in the people, strategies and infrastructure that lead to better outcomes, he fears.

As Husi notes, the money for improvements has to come from somewhere. If the government drives out private equity through constant criticism and over-regulation, government will have to step up and better cover the cost of care. For now, states may be best positioned to do that thanks to widespread surpluses.

But if the economy weakens and the feds haven’t found a way to compel states to make Medicaid payments adequate — and potentially spark more lending interest — it will be the federal government left holding the bag. Then, providers’ and patients’ futures may depend on whether CMS and the White House can move Congress in favor of more funding.

“Our nursing home industry has excelled to do so much with so little. It’s been doing that for years with the constant underfunding of the Medicaid system in many states…. States, at some point, have to be held accountable,” Wright said. “They have to realize, if you want quality care, you have to pay for it. You get what you pay for.”