It appears that the glory days of investing in skilled nursing facilities (SNF) are over. In a report from Avalere Health, profits for these facilities are predicted to flatline by 2014, only three short years from now. As a result of the 11.1% reduction in Medicare reimbursement rates, estimates show that the skilled-care nursing industry will experience a reduction in overall margins, declining from 4.4% to 0.4%.

More onerous, the report, financed by the Alliance for Quality Nursing Home Care (AQNHC), reveals that payment reduction as well as group therapy changes in FY 2012 will reduce margins from 3.8% to 0.

A new regulation from The Centers for Medicare & Medicaid Services (CMS) will trim payments for this health-care sector by $79 billion over the next decade. These cuts come at a time when SNFs are already reeling from deep reimbursement cuts for Medicaid beneficiaries, with states besieged with huge budgetary deficits.

According to Avalere CEO, Dan Mendelson, In the long term, there is concurrence among policymakers that SNFs hold the key to better patient management and cost reduction, but in the short term, these pressures on Medicare and Medicaid rates will be exceedingly difficult to manage.

Alan G. Rosenbloom, president of AQNHC, concurred, By adding substantial changes in payment methodology for therapy services, CMS also crossed the line from over-correction [of past inadvertent provider overpayments] into real Medicare cuts.

To the health-care investor, it is of vital importance to be vigilant as to the outcome of this falls Congress Joint Select Committee on Deficit Reduction, the so-called Super Committee, which has been given the arduous task of uncovering $1.2 billion in cuts to the federal budget over the next ten years. Additional Medicare cuts would, undoubtedly, be calamitous to nursing home patients, deleterious for caregiver employment and deleterious to SNFs, which provide high quality patient care in a reasonably-priced setting.

Mel Snyder

Unquestionably, cuts in Medicare will hurt the industry in general. But investors would do well to look closely at how the best of the for-profit SNFs have taken steps that should assure their profitability in both the short and long term.

Short term, in advance of the 2013 bundling provisions, SNFs can maximize profits by improving and marketing their outcomes which will induce a greater percentage of their short-stay Medicare Part A patients to pay the 20% copayment to extend their stays, to receive technology they cannot receive as outpatients. Showing outcomes advantage will induce more physicians to recommend them over local competitors, and will persuade managed care case managers to choose them over alternative inpatient providers. One of the underappreciated costs at many SNFs is the recruitment and retention of patients many could enhance their bottom lines with fewer patients and lower per-diem payments if they could enhance that aspect of their business.

I am constantly amazed by SNFs who do not develop or partner with outpatient rehab providers. Taking an integrated inpatient-outpatient approach again enables greater extraction of profits from fewer patients and lower reimbursement. Such integrated care capability will be critical to survival under the episode of care bundling that will begin in January 2013.

Long term, one can see the SNFs that will succeed they are partnering with acute-care hospitals now, and investing in technology that will help them discharge patients with a lower risk of acute-care readmission that will penalize their acute-care partners under episode of care bundling. They are partnering with assisted-living and independent-living facilities, to accelerate the recovery of their residents when they need SNF care some even building home care that is delivered into assisted living, so those facilities dont lose hard-to-replace residents.

The simple economic fact Id point out to Mr. Cockrell is that the demographics and electorate are changing dramatically in the United States. The first of the baby-boomers turned 65 in 2011, and they are a more obese, more diabetic and more at-risk population than their parents. They will present the healthcare system with a tsunami of strokes, joint replacements and other sequelae and they will expect proper acute and post-acute rehabilitation and care.

Similarly, the deep recession has resulted in an older, more obese and diabetic workforce covered by private insurance. Earlier joint replacements, earlier strokes, earlier heart attacks all will challenge SNFs to get better outcomes in shorter stays with fewer therapists.

We have been treated to a demoralizing chorus of cut-cut-cut from the far right wing of the Republican party in recent months, and a failure of leadership from the Democratic party, including the President. Entitlements such as those that fund SNFs will not be surrendered as easily as the debate suggests.

As a group, SNFs have done a very poor job in communicating their role in the healthcare system; I would bet that most Americans still confuse them with nursing homes. unless theyve had personal experience with one. SNFs will be in the front line of post-acute care for a very large share of the electorate, and if they fail to find their voice in advance of the 2012 election, then I will grant Mr. Cockrells dismal projection for 2014.

Mel Snyder

Managing Director

ProClinica Inc.

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Amber Walsh

Amber focuses on corporate healthcare transactional work and regulatory matters. Her experience includes representation of various types of healthcare providers including hospitals, health systems, dialysis facilities, multi- and single-specialty medical practices, specialty hospitals, ambulatory surgery centers, and a variety of healthcare industry entrepreneurs, in sales and acquisitions, joint ventures, general corporate matters, contracting, securities, and regulatory matters.