Cuts, market volatility rattle providers

For long-term care providers, summer 2011 will be remembered for a rollercoaster ride of congressional clashes over the U.S. debt ceiling, Medicare’s planned payment reduction to skilled nursing facilities and volatility in the stock market that left investors and public senior living companies reeling. As of press time, the mood among providers was understandably grim.

Here’s a recap of the summer’s top headlines:

Debt deal passes, leaving door open on Medicare cuts. After months of political posturing and one-upmanship between Congress and the Obama administration, a bill to raise the federal debt ceiling was finally passed August 2, narrowly averting a government default. The bill calls for up to $2.4 trillion in savings over the next decade and establishes a congressional “super committee” to recommend fiscal reforms.

“We are appalled that CMS chose to implement an 11.1 percent across-the-board rate cut for skilled nursing facilities in one year.”

An initial $917 billion in savings comes by capping federal discretionary spending. Major entitlement programs are safe from this round of cuts.

The 12-member congressional “super committee” is then tasked with finding an additional $1.5 trillion in savings, likely recommending reforms to entitlement programs. Congress must vote on the committee’s recommendations by December 23, allowing President Obama to raise the debt ceiling by another $1.5 trillion.

However, if the committee’s recommendations fail to pass congressional voting, Obama can still raise the debt ceiling by $1.2 trillion. Doing so would also trigger automatic cuts across the board, including to Medicare, lasting from 2013 through 2021. Any given cut to Medicare from this automatic response is restricted from exceeding 2 percent of the program’s cost.

CMS to slash SNF payments. Medicare will cut SNF payments by 11.1 percent, or $3.87 billion, starting October 1, under a final rule released by Centers for Medicare & Medicaid Services (CMS) on July 29. The plan for reduced funding comes on the heels of reports that providers have been paid more than $2 billion above federal projections since a new payment system took effect late last year. Industry advocates were quick to respond.

“We are appalled that the Centers for Medicare & Medicaid Services chose to implement an 11.1 percent across-the-board rate cut for skilled nursing facilities in one year,” said Larry Minnix, president and CEO of LeadingAge.

“At such a critical time, while we already face drastic cuts to Medicaid at the state level and a fragile economic recovery, this was unnecessary,” said former Governor Mark Parkinson, president and CEO of the American Health Care Association (AHCA). “Their immediate reduction to skilled nursing facilities now puts more than 100,000 healthcare jobs at risk, as well as our ability to provide quality care to our nation’s seniors.”

CMS Administrator Donald M. Berwick, MD, defended the announcement, saying the reduction reflects policy “committed to providing high-quality care to those in skilled nursing facilities and to pay those facilities properly for that care.”

Leading industry operators weighed in with projections of lost revenue. Brookdale Senior Living anticipates the payment reduction “will reduce full year Cash From Facility Operations in the range of $20 million to $25 million,” it said in a statement. “The company’s current annual run rate for skilled nursing revenue that is paid for by Medicare or by managed care entities that reimburse using the PPS is in the range of $180 million to $185 million.”

Sunrise Senior Living, of which skilled nursing units comprise three percent of the company’s units, said that assuming this cut had been in place for 1Q2011, “the company estimates that reported first quarter 2011 consolidated net income and adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] would have each been reduced by approximately $1 million,” according to a statement.

Volatile markets plus PPS cuts hurt nursing home sector. The already shaky markets didn’t take long to respond to announced Medicare cuts. Action taken in early August by Standard & Poor’s Ratings Services (S&P), which placed all six of its rated issuers in the nursing home sector on watch for downgrade, “will have a negative, immediate impact on small and large operators alike,” said Alan G. Rosenbloom, president of the Alliance for Quality Nursing Home Care, in a statement.

S&P said the planned payment reduction to SNFs “was larger than expected” and “ignited worries that reimbursement reductions will impair cash flow prospects.”

“Never in the history of the Medicare program has either CMS or Congress implemented such a large correction in one year-and the S&P warning helps confirm our concerns,” Rosenbloom said.

The six nursing home operators rated by S&P and added to the CreditWatch list were: Drumm Investors, the holding company for Golden Living; Genoa Healthcare Group; HCR HealthCare; Kindred Healthcare; Skilled Healthcare Group; and Sun Healthcare Group.

David Peknay, an S&P director on corporate healthcare ratings, said the agency anticipates the Medicare cut could reduce nursing home EBITDA by 30 percent and 60 percent “depending on the company and many other factors.”

“[B]anks who lend to regional and other local providers monitor actions by S&P, and this will increase their reluctance to lend to the sector, as well as increase costs for borrowers,” Rosenbloom continued. “This is a very serious action by S&P, and is a direct, unambiguous signal to the [Obama] administration and Congress that our sector can take no additional cuts.”

Long-Term Living 2011 September;60(9):16-17