The ebbs and flows of Medicaid reimbursement rates wield a significant influence on the success and expansion of skilled nursing facilities, and regional variation in economic factors that influence business performance of organizations wanting to grow across states can be a source of frustration.
But besides identifying regional factors linked to reimbursement, any expansion strategy can benefit from avoiding geographical areas with high labor costs and inflated asset prices as well as regions where managed care providers are dominant, experts said.
Marc Zimmet, CEO of Zimmet Healthcare Services Group, put it well: the “SNF-Economy” does not adhere to traditional business principles.
“Census, payer-mix, and operating expenses are driven by local dynamics and management, but operators cannot raise/lower prices in response to market changes,” he wrote. “This reality presents an intractable underwriting and policymaking challenge, exacerbated by significant variation across state lines. “
And one window into standardizing reimbursement rates to account for a regional variation is something that has come to be known in the industry as a “relative ratio” as Zimmet calls it.
For SNFs, a relative ratio is calculated by dividing its relative rate of reimbursement by the state’s average rate for the Patient Driven Payment Model (PDPM) indexed to the facility’s pricing. Using the adjusted state average PDPM rate sets a consistent proxy for both in-state comparison and state-by-state analysis.
Using this method, Zimmet Healthcare Services Group released its calculations of relative ratios for 2022 earlier this week.
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And, in a conversation with Skilled Nursing News (SNN), Zimmet underscored the importance of evaluating Medicaid, managed care, Medicare Part B, and other revenue sources..
As to which states are good to expand in, Zimmet highlights the crucial role of trends and identifies states that display an upward trajectory in their relative ratios of reimbursement to Medicare Part A rates.
“If you’re buying in the state, you have to look at how [operators make] money,” Zimmet said. “Either way, you have to get to the provider level, because that’s a statewide assessment.”
And beyond that, Zimmet looks at how each provider is doing at the state level. “Every provider’s got to be looked at, that doesn’t mean that facilities aren’t making money in that state. It just defines whether it’s getting more challenging or not.”
Breaking down the environment in different states
The shifting landscape of government funding is an important consideration in Zimmet’s prediction of which states are more favorable for expansion.
Zimmet cited North Carolina as a state that has seen a gradual improvement for operators, attributing its progress to the infusion of Medicaid funds. On the other hand, states like West Virginia, once considered favorable, are now grappling with challenges stemming from the rapid expansion of Medicare Advantage.
“West Virginia is still a very, very strong state,” he said. “It’s the only place in the country where you can find a building in West Virginia and compare the same building in Manhattan and a building in West Virginia is worth more.”
Yet he said that since managed care is growing rapidly in West Virginia, in a few years the state will not be as favorable for operators. Still, he said defining value for SNFs is subjective.
“We do a lot of work for banks and lenders and buyers,” he said. We never talk about what something is worth. Because the weird thing about skilled nursing is … the same property is worth a different amount to different people. It’s not an absolute value.”
Scale and additional services provided by facilities can lead to more profits. A large organization is at an advantage because it is in a stronger position to negotiate better rates for managed care. Meanwhile, an organization that houses ancillary services can generate additional income.
Moe Freedman, who is at the helm of Accolade Healthcare, recognizes the intricate balance that expansion efforts must strike, particularly in regions where managed care providers dominate the landscape.
Freedman emphasized the case of Health Alliance, a pivotal insurance carrier in the Urbana-Champaign area in Illinois. While this managed care provider holds a commanding presence, its reimbursement rates remain distressingly low.
“So, it really leads to us having to find a way to grow a census without the largest provider of managed Medicare in the area,” he said. “So, it’s going to be a challenge for the hospital. You know, they’re not necessarily happy with us because they understand that it’s always gonna raise the length of stay.”
That said, Freedman said hospitals do understand that providers have bills to pay too as long as crucial services are being provided. “We try to say yes to everything when it comes to acuity,” Freedman said.
Strategic expansion insights
Sam Bechthold, chief investment officer at Eduro Healthcare, urged skilled nursing operators to adopt a strategic mindset when considering expansion.
He cautioned against venturing into markets plagued by high labor costs and inflated asset prices, pointing at California and Colorado as prime examples.
“I would say Colorado is a market that we’re not looking to grow in. I think California is a state where, again, labor is tough. Just our costs are higher there,” he said. “And it seems like, you know, anytime anything trades in California, it trades for a premium, and I’m just not sure that you know, that we love sort of overpaying for assets in this labor market. It makes it very difficult to be profitable.”
Instead, Bechthold directed attention toward states like Texas, which offer the potential to influence Medicaid reimbursement through various avenues, particularly by leveraging therapy services.
“States like Texas that are case mix states where you can have an influence on your Medicaid reimbursement to a degree, you know, whether it’s through therapy or Part B or other things,” he said. “We have a great therapy team. And I think that favors us in states like Texas where therapy can have a big impact on your Medicaid reimbursement if it’s done right.”
