Identifying Winners and Losers from CMS’s Proposed Changes to SNF Payment Rules

The Takeaway:

CMS is proposing significant changes to the underlying prospective payment system for SNFs, which may affect SNF payments as early as October 2018 (FY 2019). The new system would make payments dependent on a wide range of clinical characteristics rather than being primarily a function of therapy minutes. We find that National Health Corporation (NHC) is the only system that would have received higher aggregate Medicare payments under RCS-I compared to RUG-IV in FY 2014. In contrast, The Ensign Group (ENSG) and Brookdale Senior Living (BKD) perform relatively poorly. We also extended our analysis to facilities that are currently owned or have their mortgage held by two REIT entities: Sabra Healthcare – Care Capital Properties Combined Entity (SBRA) and Omega Healthcare Investors (OHI). OHI stands to lose more from a shift to the RCS-I payment model. However, it is the better performer on SNF VBP measures compared to SBRA.


Summary

Provider Impact

  • NHC is the only system that would have received higher aggregate Medicare payments in FY 2014 under RCS-I compared to RUG-IV (+3% jump in aggregate payments)
  • ENSG and BKD perform poorly under the RCS-I simulation; while ENSG would have seen a decrease of roughly $8.5 million in aggregate payments (-2.6% decrease), BKD is the worst performer on a per-facility basis, receiving almost $70,000 less for each of its facilities.

REIT Impact

  • OHI stands to lose more from a shift to RCS-I. However, it is the better performer on SNF VBP measures compared to SBRA. OHI posted the lowest readmission rates between the two and also achieved a higher improvement score relative to SBRA.

Background

In April this year, CMS released an Advance Notice of Proposed Rulemaking (ANPRM) that solicits comment on potential changes to the Medicare Skilled Nursing Facility (SNF) payment system. These changes to the underlying prospective payment system for SNFs could take effect as early as October 2018 (FY 2019). CMS is currently seeking public comment on its proposal to shift from a case-mix classification model based on Resource Utilization Groups (RUG-IV) to the Resident Classification System (RCS-I). We expect CMS to further clarify the proposal in next year’s FY 2019 rulemaking cycle (likely to begin in April 2018).

Essentially, CMS’s proposed shift from RUG-IV to RCS-1 would expand the three SNF payment components currently in place (therapy, nursing, and non-case-mix) to five categories – occupational and physical therapy (OT+PT), speech language pathology (SLP), nursing, non-therapy ancillary (NTA), and non-case-mix – in the new system (see Figure 1).

RCS-I removes therapy minutes as the basis for therapy payment and it establishes a separate case-mix-adjusted component for NTA services. According to a CMS Technical Report, the new system would make nursing payment dependent on a wide range of clinical characteristics rather than being primarily a function of therapy minutes and ADL scores. Investors would note that both MedPAC and the Office of Inspector General (OIG) have, on several occasions in the past, questioned the current payment policy, especially criticizing the incentive for SNFs to bill for higher levels of therapy than necessary under the current system.

Provider Impact

Based on CMS’s provider-specific impact analysis file, which details the estimated impact of the RCS-I model on Medicare Part A payments to each SNF in the country, we estimated changes to overall aggregate payments to publicly traded SNF companies (see Figure 2).

As Figure 2 illustrates, of the five investor-owned companies that run SNFs, NHC is the biggest winner from the proposed shift from RUG-IV to RCS-I payment model. In fact, NHC is the only system that would have received higher aggregate Medicare payments in FY2014 under RCS-I than under RUG-IV. In contrast, both ENSG and BKD perform poorly under the RCS-I simulation; while ENSG would have seen a decrease of roughly $8.5 million in aggregate payments (-2.6% decrease), BKD is the worst performer on a per-facility basis and would have received almost $70,000 less for each of its facilities.

In addition to the impact from changes to the SNF prospective payment system (PPS), CMS will also be implementing value-based incentive payment (VBP) adjustments for SNFs beginning October 1, 2018 (FY 2019). Under the SNF VBP program, Medicare will withhold two percent of a SNF’s per diem rate to fund the value-based incentive payments for the year. CMS will then distribute 60 percent of the withheld amount to SNFs with the lowest readmissions rates. SNFs ranked in the lowest 40 percent of performers on readmissions will be paid less than they would otherwise be paid in the absence of the SNF VBP. For a detailed discussion on provider impact from SNF VBP changes, please see our August 9 report.

Impact on REITs

We identified a total of 1,229 facilities that are currently owned or have their mortgage held by two REIT entities: Sabra Healthcare-Care Capital Properties (SBRA) and Omega Healthcare Investors (OHI).

Our analysis of CMS’s provider-specific impact analysis file for the RCS-I payment model reveals that all REITs stand to lose from a shift to the RCS-I model. According to CMS’s simulation, OHI is relatively the biggest loser, as it would have seen a 1.7% dip in overall Medicare payments in FY 2014 under the new payment model (see Figure 4).

Skilled Nursing Facility (SNF) Value-Based Purchasing Program (VBP)

In our August 9 report, we compared the performance of the five publicly traded SNF companies on risk-standardized readmissions rate (RSRR) data available through Medicare’s Nursing Home Compare. In our today’s report, we extend the analysis to SNFs that are owned or have their mortgage held by publicly traded REITS, namely SBRA and OHI.

For each REIT, we calculated (1) the mean RSRR for all their facilities, (2) the decile ranking and distribution, and (3) their estimated improvement in readmissions rates between FY 2015 and FY 2016. Below, we outline the results of our analysis.

Risk-Standardized Readmissions Rate (RSRR)

For each provider receiving a SNF payment, CMS provides the adjusted percentage of short-stay residents who were rehospitalized after a nursing home admission – a lower percentage is better. Figure 5, illustrates the mean score for each REIT as well as the mean score nationally.

Decile Distribution of RSRR Scores

We divided into deciles all 15,676 SNFs ranked by their Adjusted RSRRs. Figure 6 shows the percentage of each REIT’s SNFs ranked in the lowest 40% based on readmissions, which means that in FY 2019 they would be paid less under SNF VBP relative to the current payment system.

Recent Improvement in Readmissions Rates

Using CMS data, we calculated the percentage change in adjusted readmissions rates between FY 20151 and FY 2016.2 This data can provide an estimate of the success of avoidable readmissions prevention measures undertaken at facilities owned by public SNF parent companies. This proxy measure is relevant as the SNF VBP payment formula also incorporates improvement scores to determine the final payment multiplier. SNFs that demonstrate significant improvement in lowering readmissions in CY 2017 (performance year) relative to CY 2015 (base year) may receive a higher score (and therefore, a higher VBP multiplier) in FY 2019.

Analysis and Conclusions

Of the two investor-owned REITs that own SNFs, OHI stands to lose more from a shift to RCS-I. However, it is a better performer on SNF VBP measures compared to SBRA. OHI posted the lowest readmission rates between the two and also clocked a higher improvement score relative to SBRA. The two REITs have almost the same percentage of their SNF portfolio ranked in the lowest 40% of facilities based on readmissions; these SNFs would be paid less under the SNF VBP than under the current payment system.


1Here, FY 2015 refers to the twelve-month period 3Q14-2Q15
2Here, FY 2016 refers to the twelve-month period 3Q15-2Q16


RISKS

The legislative and regulatory agendas are subject to change at the discretion of leadership. Unprecedented economic conditions could instigate unanticipated and/or sweeping shifts in policy. Predicting the future is a hazardous endeavor and economic / market forecasting is an imprecise science. Actual outcomes may differ substantially from our forecasts. The predictions and opinions expressed herein are subject to change at any time.

ANALYST CERTIFICATION

I, Shrey Verma, certify that (i) the recommendations and opinions expressed in this research report accurately reflect the research analyst’s personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report.

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