COVID Legal Woes For Nursing Homes Make Sector a Liability

A leading credit rating company is raising an alarm about the reliability of the skilled nursing industry, as the sector is likely to face mounting legal woes in the wake of the COVID-19 pandemic.

A newly-issued DBRS Morningstar  report says it is reviewing the ratings of commercial mortgage-backed securities that are using skilled nursing facilities as collateral in light of the legal liabilities the sector is facing as a result of the COVID-19 pandemic.

The report highlighted three transactions that are primarily backed by skilled nursing facilities, as well as a fourth transaction, set to mature in November 2021, which it is also reviewing, but which poses less of a concern since it has been significantly paid down from issuance. The company said it confirmed through media reports and service disclosures that deaths have occurred at the facilities backing loans for some of these transactions, and, although the company is unaware of any lawsuits targeting those facilities, many other properties are facing wrongful death lawsuits.

The report, written by senior vice president Edward Dittmer and managing directors Kevin Mammoser and Erin Stafford, noted that the Centers for Medicare and Medicaid Services has estimated there have been at least 45,900 deaths at nursing facilities, and an analysis from The New York Times suggested that 68,000 deaths, or more than 40% of all coronavirus deaths in the U.S., have occurred at nursing facilities.

The report said the industry is already facing litigation at the state and federal levels.

“In addition to medical liability suits at the state level, there is risk from class-action lawsuits at the federal level,” the report  said, noting that Pennsylvania’s Attorney General is also investigating potential criminal neglect in the state’s nursing home industry. “Further, should homes be found to have violated mandated standards of care, DBRS Morningstar is concerned that federal and state regulators may seek to withhold payments to skilled nursing facilities or suspend licenses of particular facilities.”

The report noted that some states, such as New York, have provided some liability protections for nursing homes, but only 20 states have done so so far and the protections that have been set in place are limited.

The report also said the ratings issues in the industry are likely to continue affecting cash flow, depressing asset valuations, effecting borrowers ability to refinance for a long time to come.

“In rating these transactions, rating committees may consider these lawsuits in the rating process and may assign more conservative ratings for transactions exposed to these properties, relative to their concluded cash flow,” the report said. “However, the staggering coronavirus-related toll adds an additional layer of risk for healthcare providers, and DBRS Morningstar sees elevated risk in the future.”