The SeniorCare Investor: CMS To SNFs: Stuff It--

Skilled Nursing Stocks Plunge With Medicare Cuts

Yes, it is déjà vu all over again, but this is not our May issue when the headline read: “Skilled Nursing Stocks Drop: CMS announcement sends investors fleeing.”  This time, skilled nursing stocks plunged, and plunged quickly, and the panic was about as bad as we have seen it in one day for one sector.  And you know it is bad when over the weekend MSNBC was flashing the news on TV screens about the 11.1% Medicare rate cut when the talking heads were pontificating about whether Congress would ever agree to something, anything, to avert the “imminent” collapse of the world financial order with a default on the federal debt.  A default was not going to happen, and while watching the circus was amusing, it was also disheartening to watch the media feed the public hysteria.  But it was amazing that the 11.1% Medicare cut news flash kept appearing.

After the initial shock on April 28 when the Centers for Medicare and Medicaid Services made its announcement that there could be anything from a 1.5% increase in Medicare reimbursement to skilled nursing facilities all the way down to an 11.3% cut, everyone sort of settled into a complacent feeling that CMS didn’t really mean it and that the cut would probably be in the 5% to 8% range.  After all, the skilled nursing sector had received approximately $2.0 billion more in Medicare reimbursement in the first half of the government’s fiscal year than it had in the last half of the previous year, representing a 16% increase because of the new RUGs-IV reimbursement protocols.  While no one was going to look a gift horse in the mouth, not many people really thought it would last more than a year after CMS discovered that they erred on some of their assumptions.  And by late July, the notion of a three-year phase-in of cuts (3%, 3% and then 2%) gained serious traction and was something that was palatable because providers of all sorts would have time to adjust both staffing and their finances.  The industry did not expect the rug to be pulled out from under it. 

Everyone underestimated just how angry CMS was because the staffers probably were embarrassed that skilled nursing providers took the new RUGs-IV rules, which did change how concurrent therapy could be billed (to the detriment of providers) but increased high therapy rehab rates (to compensate for it), and were able to adapt to the changes to their financial benefit (some have called it gaming the system, but perhaps some others should call the below-cost Medicaid payments gaming the system in reverse).  The rules guiding the provision of therapy services are complex and seem to be constantly changing, which creates a difficult environment for skilled nursing providers and their therapist employees.  Once one “loophole” is closed, another seems to pop up.  But no rules were broken, and in the case of Kindred Healthcare (NYSE:KND), patients were going home faster and, presumably, healthier, which is the kind of outcome that everyone should want.

Many providers would be okay reverting back to the Medicare reimbursement system that was in place until last September 30 (RUGs-III).  Unfortunately, what the new CMS rules do is not only cut back on the rates, but close a few “loopholes” that were there a year ago, so for some providers the 11.1% average Medicare “cut” will end up being a 14%, 15% or maybe even a larger cut until they can change their cost structure and change their Medicare patient mix.  Neither can be done overnight, and no one knows what changes may be proposed next, so it will be painful.  It didn’t help that this decision by CMS was made during the debt ceiling negotiations when everyone was looking everywhere for possible cuts in government spending.  To show how utterly stupid the talk about $2 trillion in “cuts” over 10 years is, someone is probably going to use the $4.0 billion annualized cut in SNF Medicare payments as part of $40 billion in cuts over 10 years, plus an inflation factor, of course.

It must be remembered that when everyone talks about an 11.1% Medicare rate cut, the cuts are actually in the 23 rehab RUG categories, while the other 30 categories will have a small 1.8% increase.  These rehab rate cuts range from 8.9% to 19.3%, but most of the proposed rates are still higher than in fiscal 2010 before RUGs-IV.  The difference is in how they can be billed and the allocation of therapy minutes, and that is a big difference, one that will hurt regardless of how much you benefited from RUGs-IV.  The problem is that higher acuity patients are usually in the high rehab categories, and this is where skilled nursing providers, at least the sophisticated ones, have tried to expand because first, it is more profitable and second, they can be the low-cost provider and provide quality care while still making a good profit that will, in part, help to subsidize the dismal Medicaid reimbursement rates...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today