Medicare And Medicaid Look To Eliminate System Inefficiency, Shifting Skilled Nursing Facilities To A Value-Based Model

An aging American population has led to increased demand for skilled nursing facilities capable of providing both temporary rehabilitation and long-term care. But as debates around healthcare continue to swirl in Congress, Medicare and Medicaid programs have begun to reevaluate how they cover SNFs.

The revision has the potential to afffect the quality of treatment and length of stays for patients.

Medicare, a federal program packaged into Social Security, is automatically offered to Americans 65 years and older. Under Part A, beneficiaries do not have to pay for hospital stays under 60 days. In an SNF, they can stay up to 20 days without paying a premium.

The goal for the Centers for Medicare and Medicaid Services is to consistently shorten patient treatment and push for a more efficient system, one that eliminates excessive service costs tacked on for one procedure. The solution involves an overhaul in not only the quality of SNFs, but also how they are assessed and funded by CMS. It is a shift from a cost-based to a value-based model.

“By 2018 we are going to see the value-based model taking hold,” Hunt Mortgage Group Vice President KC Peterson said. 

Under the value-based model, and CMS' supervision, facilities will be incentivized to treat individuals better. The improved practices are expected to lead to fewer lawsuits and operational issues.

Upgrades will require an additional investment from operators, but Peterson believes the improvements will result in less recidivism for the same procedure, making the facility more likely to continue to receive both funding and patients.

“There will be upfront costs to reducing turnover operations, upgrading technology to monitor the care that they are providing, enhancing tracking and holding themselves accountable,” Peterson said.

In 2011, 10,000 baby boomers turned 65. Another 10,000 people will cross that threshold every day for the next 19 years, according to the Pew Research Center. As SNFs continue to improve in quality and turnover, lenders like Hunt Mortgage Group have increasingly looked at them as a stable and much-needed investment.

“SNFs generate a substantial amount of income on a monthly and a yearly basis,” Peterson said. “Typically, they are valued with more realistic cap rates than multifamily, which allows there to be a sizable amount to debt service coverage when we close the transaction.”

Hunt Mortgage Group helps SNF operators finance new facilities and refinance existing ones. Many times nursing facility owners can include borrower-elected improvements in the mortgage amount as they shift to a value-based model. Hunt Mortgage Group facilitates loans through the U.S. Department of Housing and Urban Development’s 232 program. Section 232 is a Federal Housing Authority loan product that provides mortgage insurance for residential care facilities. Hunt steps in as a direct lender to provide non-recourse loans insured by the department at higher leverage points and lower rates than the private lending sector can provide.

“Our footprint is nationwide and our primary goal is to take the facilities to long-term financing through the HUD 232 program,” Hunt Mortgage Group Director James Neil said. “If we need to take facilities in the interim through a bridge loan process, we can facilitate that with local or regional banks or the short term would be us, Hunt Mortgage Group, providing the permanent financing.”

While the division of Hunt Cos. is only two years in, the team has already submitted several HUD applications, with numerous transactions closing in June. Hunt Mortgage Group also services all of its loans, and utilizes a team of underwriters and originators with years of experience financing this property type.

Neil sees the SNF space as an opportunity for lenders if they do their homework and push for quality operators. It is a trend that is catching on at a federal level.

“It’s always been my model to deal with experienced operators,” he said. “The difference is that now, the states and the federal government, which are the major payment sources for nursing homes, are putting measures that require certain quality metrics to be hit. There is a real push for the facilities themselves to perform better and better so that their revenue can increase. So they are being held, on the payment side, more accountable for quality.”

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