The Hidden Costs of Declining Reimbursements for Skilled Nursing Facilities

The Hidden Costs of Declining Reimbursements for Skilled Nursing Facilities

The ability of skilled nursing facilities (SNFs) to provide quality care is under increasing pressure thanks to declining Medicare and Medicaid reimbursement rates. In some states, a drastic increase in the number of Medicaid patients has even led to the closing of centers. In Nebraska alone, 21 facilities were taken over by the state in 2019 due to poor financial performance. Four of these are slated to soon close.

But times are tough all over. According to a study conducted by CliftonLarsonAllen, the median operating ratio for skilled nursing facilities  plummeted below zero percent in 2018. In this environment, it’s difficult for both long- and short-term centers to remain afloat without a strategic plan for addressing the issues.

Declining Reimbursements Initiate a Snowball Effect

 “Any long-term solution to our funding problem must focus on Medicaid,” said Mark Parkinson, CEO of American Healthcare Association in a comment to Skilled Nursing News. “That is where our dramatic underfunding occurs, and it’s time for states to step up and take care of the elderly.”

It’s certainly no surprise that declining Medicare and Medicaid reimbursements impact SNF profitability, but seldom do we take a deeper look at the issue to understand the effect on the center as a whole.

The Bureau of Labor Statistics anticipates 200,000 openings for skilled nurses by the year 2026 as baby boomers retire, and many become patients of skilled nursing facilities. That isn’t good news when you consider that 72 percent of directors of nursing have indicated that they are already short skilled nurses. It’s a market trend where SNFs are particularly vulnerable. To attract talent in a tight labor market, SNFs need to offer competitive salaries, a hardship when revenues are tight.

To fill vacancies, many SNFs have had to rely on medical staffing firms (MSFs). While it is an efficient means of locating talent, it comes at a higher cost, driving up expenditures at a time when reimbursements overall are sliding.

Unfortunately, it isn’t just reimbursements that are dwindling. Length of stays have also plummeted in recent years under Accountable Care Organizations and Medicare Advantage plans, according to a recent study.

Medicare’s new Patient-Driven Payment Model (PDPM), enacted in early October of 2019, may be a bright spot on the horizon for some SNFs, but only time will tell. As compensation becomes determined more by the needs of the patient than the time spent on patient care, facilities will need a different strategy to realize profitability, including developing expertise in certain acuities to take on more complicated patient cases.

Combatting Declining Reimbursements for Greater Profitability

SNFs like to put the patients first and accept admissions based on need, rather than cost considerations. However, in the current environment, a strategic approach is often necessary to remain in business.

SNFs should be looking to diversify their payer mix. As Medicaid reimbursements decline, facilities need a varied stream of revenue to cover operational expenses and ensure quality patient care. Ensuring the right payer mix needs to start before admission, at the time the call from the hospital comes. Software is available to help SNFs determine the long-term profitability of a patient before offering admission, ensuring that their needs won’t run the facility into the red.

Maintenance is another important issue that often gets left behind, particularly for older centers. In a tight revenue stream, funds are often diverted first to essentials such as higher salaries for nurses. However, remaining viable in a low reimbursement environment means your building and grounds could be nearly as important as the care you provide when it comes to attracting new patients, especially those covered by private payers or Medicare.

Lastly, consider additional revenue streams. SNFs that join with an assisted living facility, for example, can continue to provide care for some patients after discharge, while also welcoming new patients at differing reimbursement rates to the network.

Overall, SNFs need to be thinking long-term and establishing a strategy that focuses on positive cash flow to continue providing excellent care to the patients they serve.

First National Healthcare Banking offers a full suite of revenue cycle solutions that allow our customers to focus their time and resources on what matters most – providing the best possible healthcare services throughout our communities. We offer financing for working capital, new construction, renovations, equipment acquisitions and patient financing.

About the Author

Oscar is the Vice President of Healthcare Banking at First National Bank, where he joined in 2007 and has held numerous commercial banking positions. He grew up in Mexico City where he attained his Bachelor's in Economics and interned at the Central Bank. He then moved to Spain and obtained his Master's in Banking and Finance, and finally moved to the United States and received his MBA with a concentration in corporate finance.