Positive news for skilled nursing businesses

Though your employees go above and beyond for patients, they have limits. Chances are, you saw considerable turnover as staff members faced burnout, felt overworked relative to wages at the time and decided to leave the profession. This led to industry-wide labor shortages.

To fill this gap, many facility operators turned to consultants and third-party staffing agencies, typically costing 50 to 60% more, and even higher, as a full-time employee. Considering that labor is the largest expense on facility income statements, this substitute was especially painful to bottom lines.

Operators realized they could still come out ahead by significantly increasing pay for full-time employees. Operators often increase hourly rates to reduce turnover and compensate employees dealing with higher costs because of inflation in their daily lives.

By making these pay adjustments, skilled nursing facility operators have stabilized their workforces and reduced the need for more expensive stop-gap solutions, especially since employee working conditions are less stressful than during the pandemic.

Of course, it’s easy to tell you to pay your staff more, but being able to do so depends on your financial position. For most operators, 80% to 90% of revenue comes through Medicaid and Medicare reimbursements.

Government policy follows a lag. While you and the industry have dealt with higher costs for years, reimbursement rates have not kept up. But we expect that to change soon.

Through industry lobbying activity, we anticipate rate increases across the spectrum. State government agencies see the need to pay higher daily reimbursements so facilities can keep up with labor costs, maintain staffing levels and provide better patient care.

Now, 20 states and the District of Columbia use value-based payments to drive better quality of care. If your facilities achieve positive results on patient surveys and meet quality benchmarks, you could receive even more than standard daily patient reimbursement rates.

The amount and speed of rate increases will not be uniform nationwide. After all, there are over 50 separate Medicaid programs for all the states and territories, each operating independently. However, the overall trendline should be favorable to meet inflationary pressures. Facilities operating at breakeven or a loss need to continue fighting through and wait to turn profitable again because higher reimbursement is on the horizon.

In September, the Federal Reserve cut interest rates for the first time in four years. The Fed was also surprisingly aggressive, reducing rates by 50 basis points versus a more cautious 25 basis point step.

Based on Chairman Powell’s language, CIBC’s Chief Economist Avery Shenfeld believes there could be an additional rate cut in December, with more cuts potentially coming in 2025 and even 2026, depending on inflation and government fiscal policy.1 The Fed is concerned about a softening labor market and wants to support the economy.

This is welcome news for skilled nursing facility operators using floating-rate debt to finance their operations. As rates steadily rose to the highest in over 20 years, so did these debt payments. It was one more financial pain point for a beleaguered industry.

But now that rates are trending in the other direction, floating debt payments will go down, too. The immediate rate cut should free up working capital for operators that could use the extra cash flow badly.

Given the shift in Fed priorities, it could make sense to revisit your capital plan. As you likely experienced over the years, floating rate debt can be unpredictable and stressful as rates and payments change.

If you want to mitigate this interest rate risk, consider swapping your floating-rate debt for a fixed-rate agreement. This move could lead to an immediate reduction in your cost of capital, taking your interest rate down by roughly 1.3 basis points. For instance, a 4.8% floating rate today could be reduced to a fixed 3.5% rate for five years.

Today’s fixed interest rates have already been partially priced in future Fed cuts, making them more affordable than in the past. You could save that money today while no longer worrying whether the Fed will follow through with further reductions on your floating rate debt. This strategy will not make sense in every situation, but it is worth considering in this new environment.

Conditions for nursing facilities are finally changing for the better. Let CIBC's team of dedicated experts help you take advantage of them.

CIBC's Healthcare group has more than 20 years of experience advising operators through the ups and downs of market cycles like these. We can help you reevaluate your financing needs or find creative solutions tailored to suit your business. To learn more, visit our Healthcare Banking page. We also invite you to call our professionals at 312-564-1227 Opens your phone app..

¹ For details, read Avery Shenfeld’s report Fed takes giant leap, hints at smaller steps ahead (PDF, 105 KB) Opens a new window.