Expect Continued Pressure on Skilled Nursing Margins in 2024

As we venture through 2024, the skilled nursing sector is preparing to navigate the challenges and seize the opportunities that lie ahead. The sector is focused on securing increased funding, enhancing public education about the sector, and addressing the ongoing workforce challenges. 

Many skilled nursing experts project that 2024 may be a critical juncture for the industry. The growth of the aging population is expected to lead to increases in occupancy rates for skilled nursing operators.  According to the fourth quarter 2023 data from NIC MAP Vision, at82.7%, skilled nursing occupancy has recovered 9.3 percentage points from the pandemic low (1Q2021, 73.4%), but is still 3.5 percentage points below 1Q2020 levels. 

Given the challenges such as continued occupancy below pre-pandemic levels, operators have had to pivot and adjust to a more difficult operating environment in recent years. 

Many operators have increased focus on key operational improvements during this time. Operators are implementing strategies to enhance efficiencies and concentrating on staffing headwinds. For example, strategies that utilize data to drive outcomes with the assistance of Artificial Intelligence (AI) have proven beneficial. Many believe AI has the potential to reduce routine administrative burdens, guide clinicians to better outcomes, and improve the quality of care. Additionally, there is an aim to increase clinical competency among staff through enhanced apprenticeship programs and internal educational courses. Efforts are also being made to address staffing issues by focusing on diversity, equity, and inclusion initiatives.  

A positive for the sector has been the increase in Medicaid reimbursement rates in many states. The increases have been essential in mitigating expense pressure for operators. However, some believe there is a possibility the sector will face financing threats due to the recalibration for Medicaid rates. In an attempt at budget neutrality, states typically withdraw funds that they initially allocated, in an effort known as “recalibration.” If this comes to fruition, it could pose more of a challenge for rural and smaller skilled nursing properties, rather than to larger ones. Many would also agree that while these increases have been beneficial, they have lagged for many years and, in many cases, still do not fully cover the cost of care provided.  

As mentioned above, expense pressure is palpable, and this is leading to the squeeze in profit margins. This is due to a combination of factors, including continued wage-related and workforce expenses, rising interest rates and general inflationary cost increases. These economic pressures are driving up operating costs, thereby reducing the profitability of skilled nursing properties.  

Another factor contributing to the margin squeeze is the growth of Medicare Advantage. The growth of Medicare Advantage (MA) plans has been challenging for operators, impacting margins, and sometimes leading to issues of high claims denials for service providers. High claim denials can result in an additional administrative burden during a time when nursing home staff is already stretched thin, in addition to increasing expenses due to higher bad debt items. Furthermore, operating revenue is pressured due to lower Medicare Advantage reimbursement compared to Medicare Fee-for-service. The Medicare versus Managed Medicare differential from the October NIC MAP Vision Skilled Nursing Data Report revealed that MA plans were reimbursing $123 less per patient day compared to traditional Medicare. The disadvantages of MA plans to providers have led a number of skilled nursing entities to explore ownership of their own MA plan and other value-based care arrangements where there is the potential for upside risk.  

Last, there are concerns regarding the proposed federal staffing mandate as the sector continues to strive for better quality of care. Many believe this mandate could potentially compromise the quality of care and limit accessibility for many Americans, in addition to causing significant financial viability problems and potentially resulting in the closure of additional properties. 

While there are demographic tailwinds, skilled nursing operators are facing a multitude of challenges in 2024. However, with strategic planning and effective advocacy, operators can navigate these challenges and continue to provide quality care for their residents. The industry remains hopeful that with predictable funding, long-term solutions to some of the most critical problems facing the industry can be addressed, ensuring the quality care our seniors deserve and paving the way for a sustainable future for skilled nursing services.