Policy makers would serve the nursing home industry better if they understood where and how capital markets can most effectively support the sector – namely how private financing plays a role in helping support a challenging operating environment.
According to a new report compiled by ATI Advisory and commissioned by the National Investment Center for Seniors Housing & Care (NIC).
Current policy proposals, most of which are in the Biden administration’s reform package, increasingly call for greater transparency from owners and operators, increased Medicaid home care, and the imposition of mandatory staffing levels.
Such proposals “fail to address the root cause of the problems they attempt to address,” according to the report.
Public-private partnerships are failing to reach the residents they are meant to serve, the researchers added — uncoordinated policy decisions have delayed SNF’s ability to attract needed capital and upgrade facilities.
Meanwhile, Medicaid reimbursement rates in many states are insufficient to support care, which means access to private capital to supplement government reimbursements is even more crucial.
These combinations were originally created about 50 years ago to help beneficiaries of Medicare and Medicaid nursing homes access benefits.
Private investment has always funded construction, while Medicare and Medicaid fund day-to-day operational support, the researchers said, but that dynamic hasn’t evolved to “meet the growing needs of a rapidly aging America” or to meet practical budgetary constraints.
While NFCs can use a variety of debt and equity options, the U.S. Department of Housing and Urban Development (HUD) and local commercial lenders remain the main options, the researchers found.
ATI has broken down nursing home capital structure options into sources of debt financing, with sources including HUD and commercial lenders, and equity financing, which handles the betting of public operating companies and private, public and private real estate investment trusts (REITs), and private equity.
Senior debt funding sources – like HUD, KeyBank and Truist – have the lowest return profile and highest priority, and a shorter process to close funds.
Junior/hybrid debt can look like high yield bonds or mezzanine loans, and can start to look like stocks. ATI considers Capital Funding Group, Meridian Capital Group and Midcap Financial to be part of this group of financiers.
The group of stocks that present the highest return hurdles given insolvency risks include Welltower Inc., Ventas, Formation Capital and The Carlyle Group, according to the report.
Operators partner with certain funding sources depending on where the business is in its lifecycle, the researchers said.
Still, HUD’s “long-standing dominance” in the nursing home industry proves its reliability as a source of long-term funding, but this program could better serve residents by encouraging innovation, the researchers added. .
ATI data found HUD insuring more than 2,300 active mortgages in 2019, up from about 800 in 1995; HUD Section 232 guaranteed $4.9 billion in loans in 2021 alone — more than half of that funding was for nursing homes.
While the first 30 years of the public-private partnership created about 17,000 retirement homes, the industry had to deal with “two largely uncoordinated government programs,” referring to Medicaid and Medicare. The analysis characterizes the reimbursement systems as dysfunctional and unpredictable.
The “appetite” of private investors is closely linked to future cash flows, according to the researchers, which are subject to repayment, among other changes in policy and decision-making. This reasoning means that there is “significant investment risk” that could increase the cost of capital in the industry, according to the ATI analysis.
Among all payers, reimbursement policies have inhibited access to capital that values clinical investment and technological innovation, largely targeting real estate capital – and in turn new construction – instead of investors who would turn to improvements and innovation, notes the report.
“Government can be part of the solution by encouraging renewed partnerships with the private sector to retrofit buildings, boost technology, adopt cutting-edge infection prevention and support the skilled nursing workforce,” said Kurt Read. , Chairman of the NIC Board of Directors. directors, said in a statement. “The past few decades have shown that the status quo does not meet the needs of frail older people who are served by skilled nursing facilities.
The analysis highlighted four ways federal policymakers can improve the industry as a whole, including supporting access to capital, as well as incentivizing innovation, adopting quality measures focused on transparency and, of course, adopting measures to improve labor supply and retain the existing labor pool, in the midst of a historic staffing crisis for the industry .
“When the root cause of a problem is circumvented, only the symptoms are addressed,” said Brian Jurutka, NIC President and CEO, in a statement regarding public-private partnerships in space. “Skilled nursing facilities have well-documented challenges that need to be addressed. Solutions begin by aligning owner and operator incentives to improve facilities and operations, invest in the workforce, and most importantly, innovate to improve care and quality of life for residents.
The ATI researchers concluded that well-intentioned policymaking has forced nursing home operators to turn to debt financing and equity investors to fund their businesses.
Equity investors have become an “important lifeline” for nursing homes as industry leaders seek to modernize the industry – without prior government funding, the study found. Innovation, infrastructure improvements and person-centred care have been difficult to achieve through reimbursement alone.
“Future public health policy would be wise to leverage the knowledge and capabilities of financial industry experts and use this collaboration to differentiate bad actors from constructive market actors,” the researchers said.