CMS' Reimbursement Proposal Falls Far Short for Skilled Nursing Facilities
Last year government relief for the sector ultimately had the practical effect of less rent deferral and rent concessions.
The Center For Medicare and Medicaid Services’ reimbursement proposal for skilled nursing facilities falls far short of analysts’ expectations, with the budgeted increase for FY22 significantly lower than the $750 million awarded last year.
CMS’ proposal for skilled nursing facilities includes a 1.3% year-over-year increase, accounting for about $444 million in Medicare Part A payment to SNFs next fiscal year.
In an analysis of the proposal, Omotayo Okusanya of Mizuho Americas Analyst REIT Research, noted that CMS “explicitly called out Medicare payments above their expectations with the new PDPM system, with cuts set to happen ‘as soon as possible in order for CMS to achieve its initial goal of budget neutrality when the new reimbursement system was initially implemented.” Okusanya also expressed worry that recent efforts in New York to cap profitability in the sector could spread to other jurisdictions, especially as the federal government increases regulation in the SNF sector post-COVID.
“These developments do not bode well for Healthcare REITs that focus on skilled nursing such as Caretrust, Sabra Health Care and Omega Healthcare,” Okusaya noted. While Mizuho stopped short of predicting a concrete impact on earnings, the firm noted in its analysis that the changes could weaken rent coverage going forward, and said that increased tenant credit risk typically negatively impacts valuation multiples.
Government support remains crucial for the SNF industry; late last year, Mizuho reported that the government pumped $14.6 billion into the sector, equating to $1 million per skilled nursing facility in the US. And last year, skilled nursing facilities benefited from additional Medicaid payments through FMAP, a temporary suspension of the 2% Medicare sequestration period and a 2.2% increase in skilled nursing Medicare reimbursement in October. That relief ultimately had the practical effect of less rent deferral and rent concessions, Mizuho said.