Skilled nursing facilities’ profit margins will shrink over the next four years, projects national consulting firm McKinsey & Company, even as other post-acute services make moderate gains.
Nursing homes, inpatient rehab facilities and independent labs are the only three provider categories for which McKinsey expects to see negative EBITDA through 2026. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a common way to measure the profitability of corporate organizations.
Assisted living, hospice and home health operators, by comparison, were expected to see EBITDA profits grow by up to 5% between 2021 and 2026, the McKinsey report found. Value-based staffing groups and virtual healthcare providers offering home health and office visits, meanwhile, were expected to see their margins improve 10% or more through 2026.
Skilled nursing’s dependency on the constrained nursing labor market will make it subject to intense financial pressures for the foreseeable future, McKinsey authors noted. A separate analysis issued by the American Health Care Association on Thursday showed that the sector’s workforce recovery actually slowed in 2022, with pre-pandemic levels now not expected until 2027.
“Provider profit pools faced substantial pressure in 2022 and are likely to continue to do so in 2023 as a result of inflation and increased labor costs,” McKinsey noted about the healthcare sector in general.
Citing increased costs, several owners and real estate investment trusts have reduced their skilled nursing presence since 2021. Further pressure on EBITDA could extend that trend.
The firm predicts overall margin reductions since 2021 could end up totalling a quarter by 2023, but that would be followed by a rebound bringing 15% annual growth from 2023 to 2026 across healthcare sectors.
“The US healthcare industry faces demanding conditions in 2023, including recessionary pressure, continuing high inflation rates, labor shortages, and endemic COVID-19,” wrote Neha Patel, a McKinsey partner in New York, and Shubham Singhal, a senior partner in Detroit.
“But players are not standing still,” they added. “We expect accelerated improvement efforts to help the industry address these challenges in 2024 and beyond, leading to an eventual return to historical average profit margins.”
Those interventions could include cost-optimization measures, such as pursuing increased labor productivity and the application of new technologies to improve workflows.
McKinsey laid out a series of possibilities regarding profit recovery.
In the “best-case scenario,” a third of post-acute providers would recoup substantial cost savings alongside the majority of hospitals. That would limit industry-wide EBITDA margin declines by 90 basis points. In a “worst-case scenario,” lower savings achieved by only half of hospitals and just one-quarter of post-acute players, McKinsey expects greater overall declines.