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Report: Unless They Improve, Low-Performing SNFs Face Extinction

      A new report paints a grim picture of the future for skilled nursing facilities outside the elite high-performing ranks. Trends suggest even the typical SNF may have experienced a negative operating margin in 2017 — a far cry from the healthy income levels of just a few years ago.
      Unless they improve their quality measures right away, analysts warn, struggling SNFs face a dramatic risk of extinction. “In short, the environment for SNFs is difficult, and a growing number of SNFs are approaching insolvency,” states a white paper based on 2016 data published by CliftonLarsonAllen (CLA), an accountancy firm that provides consulting services to the health care sector.
      The main reason for the shift, according to the analysts, is the cascading effects of an intense focus on cheaper, higher-quality approaches to treating the most seriously ill patients. “As we look into the future, high performers will continue to attract referrals, which will in turn produce better financial results,” the report said. “Less successful providers will have more substantial struggles from one year to the next, which may ultimately result in the sale or closure of facilities.”
      The findings in the CLA report, “32nd Edition of the Skilled Nursing Facility Cost Comparison” (https://goo.gl/EGCau7), are based on financial and quality metrics from all of the more than 15,000 Medicare-certified SNFs in the United States.
      The authors point to a number of factors related to health care reform that are driving the widening financial divide in the SNF industry between the high-performing and low-performing facilities.
      On one front, greater interest in alternatives to hospitals is leading to fewer hospitalizations and, as a result, a dip in subsequent SNF referrals. On another front, pressures are pushing hospitals to refer the patients who are still hospitalized to treatment options such as home health care, rather than SNFs.
      The report homes in on several financial indicators that provide insight into the health of the SNF industry.
      • • Current ratio, a measurement of the liquidity of a facility. “Despite reduced operating results, skilled nursing facilities have maintained consistent current ratios when compared to prior years,” the report said. “This indicates that organizations are preserving cash on the balance sheet to pay for current liabilities, as opposed to providing returns to operators in the form of distributions.” However, the report noted that the Southwest region (Arizona, New Mexico, Texas, and Oklahoma) has especially low ratios, mainly due to lower occupancy rates.
        Current ratio, a measurement of the liquidity of a facility. “Despite reduced operating results, skilled nursing facilities have maintained consistent current ratios when compared to prior years,” the report said. “This indicates that organizations are preserving cash on the balance sheet to pay for current liabilities, as opposed to providing returns to operators in the form of distributions.” However, the report noted that the Southwest region (Arizona, New Mexico, Texas, and Oklahoma) has especially low ratios, mainly due to lower occupancy rates.
      • • Days revenue in accounts receivable, a measurement of how quickly a facility turns receivables into cash. The report noted an unusual increase in this number, possibly because some facilities are having trouble figuring out how to get paid promptly by Medicare Advantage plans.
        Days revenue in accounts receivable, a measurement of how quickly a facility turns receivables into cash. The report noted an unusual increase in this number, possibly because some facilities are having trouble figuring out how to get paid promptly by Medicare Advantage plans.
      • • Days cash on hand, a measurement of how long current available funds will handle typical expenses. This number has crept up, suggesting that “providers are increasingly cautious to use cash for capital purchases and owner distributions.” The report noted that the facilities in the quartile made up of the worst performers tend to have fewer than 2 weeks of cash on hand, suggesting they “may have recurring concerns about making payroll.”
        Days cash on hand, a measurement of how long current available funds will handle typical expenses. This number has crept up, suggesting that “providers are increasingly cautious to use cash for capital purchases and owner distributions.” The report noted that the facilities in the quartile made up of the worst performers tend to have fewer than 2 weeks of cash on hand, suggesting they “may have recurring concerns about making payroll.”
      • • Debt to capitalization (leverage ratio), a measurement of a facility’s ability to take on more debt. The report found that “the median facility either secured additional debt, or negative financial performance resulted in reduced equity when compared to the prior year.” The analysts found that low-performing SNFs actually had negative equity, while the high-performing SNFs in 2016 were actually in a better place to borrow money than in 2015.
        Debt to capitalization (leverage ratio), a measurement of a facility’s ability to take on more debt. The report found that “the median facility either secured additional debt, or negative financial performance resulted in reduced equity when compared to the prior year.” The analysts found that low-performing SNFs actually had negative equity, while the high-performing SNFs in 2016 were actually in a better place to borrow money than in 2015.
      • • Capital spending ratio, a measurement of reinvestments in facilities. “The 75th percentile SNFs reinvest four times more of their revenue into their facilities than 25th percentile SNFs,” the report said. “As resident preferences evolve, it is expected that some facilities will simply be undesirable to the post-acute consumer, which will impact admissions, occupancy, and ultimately financial performance.”
        Capital spending ratio, a measurement of reinvestments in facilities. “The 75th percentile SNFs reinvest four times more of their revenue into their facilities than 25th percentile SNFs,” the report said. “As resident preferences evolve, it is expected that some facilities will simply be undesirable to the post-acute consumer, which will impact admissions, occupancy, and ultimately financial performance.”
      • • Operating margin, a measurement of profitability. The median SNF operating margin in 2016 was just 0.5%, down from 1.2% the previous year. “If this trend continues, the median SNF will experience negative operating margins in 2017,” the report said. Median operating margins were negative overall in the Midwest, Northeast, and Southwest, while reaching a healthier 3.1% in the West and 1.7% in the Southeast.
        Operating margin, a measurement of profitability. The median SNF operating margin in 2016 was just 0.5%, down from 1.2% the previous year. “If this trend continues, the median SNF will experience negative operating margins in 2017,” the report said. Median operating margins were negative overall in the Midwest, Northeast, and Southwest, while reaching a healthier 3.1% in the West and 1.7% in the Southeast.
      • • Earnings before interest, taxes, depreciation, and amortization (EBITDA), a measurement of profitability. “Organizations in the 75th percentile experienced a modest 20 basis point reduction in EBITDA in 2016, when compared to a 90 basis point reduction for 25th percentile performers,” the report said.
        Earnings before interest, taxes, depreciation, and amortization (EBITDA), a measurement of profitability. “Organizations in the 75th percentile experienced a modest 20 basis point reduction in EBITDA in 2016, when compared to a 90 basis point reduction for 25th percentile performers,” the report said.
      The bottom line, according to the CLA report? “Status quo performance will not suffice.”
      Randy Dotinga is a San Diego-based freelance writer.