Next week, the Center for Medicare and Medicaid Services (CMS) is scheduled to roll out a new reimbursement model that could significantly affect the cash flow and financial flexibility of skilled nursing facilities.
Under the program, known as the Patient-Driven Payment Model (PDPM), CMS is linking skilled nursing facility (SNF) reimbursements to the value of care given. When it goes into effect on October 1, PDPM will replace the current model that pays SNFs based on the volume of services rendered. One of PDPM’s primary goals is to encourage activities that improve a patient’s health, which is part of a broader shift at CMS over the last few years to base payments on quality of care.
“CMS is setting up a methodology that revolves around patient acuity — what the patient’s status is, and the type of services they should be receiving — as opposed to reimbursing facilities for providing an hour of nursing service or therapy,” says Christopher Callaghan, group vice president for the healthcare banking group with M&T Bank. “It sounds like a reasonable shift; but if you’re not equipped to care for certain levels of acuity, or to track and document each patient’s diagnosis and services, then you could be exposed to revenue reduction.”
Indeed, PDPM is expected to changes business strategies, staff management practices and financial planning systems, and SNF owners have been preparing for the switchover by investing in new technology and training. But it’s hard to know exactly how PDPM will affect SNF bottom lines, states Paula Quigley, FHA/HUD program manager for M&T Realty Capital.
Quigley recommends that SNFs begin communicating with their banks now to understand the funding options available if the need arises or if a dip in revenue complicates growth or financing plans. “If performance lags, it’s important to be working with a lender who can adapt,” she adds.
In particular, the uncertainty could complicate plans for SNF owners that want to pull equity out of their properties to finance acquisitions or expansions, or that want to convert a short-term loan to permanent financing, Quigley explains. For example, SNF developers taking advantage of M&T Bank’s bridge-to-HUD product, which provides cash-out financing through a bridge loan while setting the stage for HUD’s 232/223(f) permanent financing to eventually replace it, may need to reassess their financial position as PDPM kicks in over the next few months. (For more details about the bridge-to-HUD product, see our story from June.)
Applying for a HUD loan is already a months-long process, and given that HUD relies heavily on trailing 12-month cash flow as part of its underwriting process, a sudden shortfall due to PDPM could delay a HUD loan even longer. For its part, M&T Bank and its Realty Capital arm have the flexibility to either extend a bridge loan to maximize proceeds or re-size the HUD financing – or to take both actions if needed, Quigley says. M&T also can provide short-term capital loans or lines of credit apart from a bridge loan to finance additional equipment, technology or capital projects, Callaghan adds.
“The unknown of how Patient-Driven Payment Model will impact cash flow is what keeps the owners of skilled nursing properties up at night,” Quigley says. “We have the ability to modify and adapt to the circumstances of borrowers without affecting them too much.”
Even though CMS announced in July 2018 that it intended to change its payment model, it didn’t release final PDPM rules until a year later, which has more than likely put some SNFs in catch-up mode. More change is coming, too. While Medicare only accounts for about 20 percent of SNF revenue, similar reimbursement modifications are on the horizon for Medicaid and managed care over the next 12 to 24 months, according to CMS. All told, these programs account for about two-thirds of a typical SNF’s revenues, according to the National Investment Center for Senior Housing & Care, a non-profit data and analytics provider to the seniors housing industry.
Upon PDPM implementation, SNFs are expected to see the following trends:
- Facilities with the highest revenue under the current payment model are likely to see a greater revenue decline than lower-revenue facilities.
- Facilities will have less incentive to provide patients with specific, high-revenue therapies.
- PDPM makes significant cuts to follow-up assessment requirements.
- Facilities will absorb additional costs related to technology, staffing, training and new operating procedures.
Some SNF owners may be tempted to simply add more acute patients to ensure that they maintain their revenue level, if not increase it, Callaghan notes. But that strategy could backfire. “The tricky part about bringing in higher acuity or additional morbidities is that it often adds more expense,” he explains. “So it’s not necessarily the case that higher acuity equals additional profitability.”
A detailed discussion of PDPM can be found at M&T’s website, here.
M&T Realty Capital Corporation is a wholly-owned commercial mortgage banking subsidiary of M&T Bank, Member FDIC. Equal Housing Lender. Bank NMLS #381076.