What a
great crowd. Thank you for joining us this afternoon and for everybody that made their way down here to beautiful room. And thank you for those who are attending via webcast. In addition to a number of members from the Omega management team, We have Board members from Omega attending today: Bernie Corman, our former Chairman Steve Plavin, a long time Director and Head of our Nominating Governance Committee. And a little bit later, Craig Callan, our Chairman, will be attending.
I think he's stuck in traffic. Our goal today is to provide you with insight into the skilled nursing facility industry in 2 ways. 1 is with our operator panel, and we'll be doing a question and answer session led by Jeff Marshall. And later, we'll open it up to the room, and I encourage you to ask these guys whatever you want. They haven't been prepped at all, so you'll get very candid answers.
And then the second part of the session, Matthew Gourmand, who put together the presentation today, is going to go through a lot of what we talked about on the data initiative side and how we think that data is going to drive this industry over the next decade, including a model that we are going to share with the group. So you can take it with you and sensitize it and play with it and look at how we look at things. We believe we've accumulated more and better data than anybody. We use it on a local basis every day in our decision making, and we think it's a valuable advantage that we have that none of our peers have. I'd also like to thank the operating panel, a terrific group.
You have a diverse group here too as well. You have a public multi state public company operator, a large regional multi state operator and 2 individual state sharpshooters of medium size. So you get a lot of different views, and we're excited for them to share their views of the industry and their individual businesses. So let's get started. One housekeeping item for those on the webcast or anybody that's not interested in raising their hand to ask a question, if you want to ask a question via e mail, feel free to e mail Matthew Gourmand's address with your question, and we'll put it in the queue at some point.
So with that, Jeff Marshall, our Senior VP of Operations, will introduce and moderate the panel. Thanks, Jeff.
Thanks, Taylor, and welcome to everyone. I would first like to introduce our 4 panelists, each an executive of a skilled nursing facility operating company with a varying number of SNFs leased from Omega. To my far right is Mike Wallace. He is the President and Chief Operating Officer of Daybreak Venture, which operates 52 Omega owned Texas SNFs. Mike served as Daybreak's CFO from 2,009 through 2015.
He left to start his own SNF operating company and was recruited back to Daybreak in early 2017 to lead the company through its restructuring and recapitalization efforts. Mike has over 29 years of experience in health care services, holds a bachelor's degree in accounting from Southwest Texas State University and currently serves on the Executive Committee of the Texas Medicaid Coalition. To my far left is Barry Port. He has served since 2012 as the Chief Operating Officer of Ensign Services, a publicly held entity which operates 100 and Barry has served Barry has served in various executive capacities with Ensign since 2004 and holds a bachelor's degree from Brigham Young University and a master's degree from Arizona State University. To my immediate right is Fran Curley.
He is the Founder, President and CEO of Nexeon Health, which operates 26 SNFs in 3 states, including 12 Louisiana SNFs and 6 Texas SNFs owned by Omega. Fran has over 35 years of acute and subacute management experience, has served on SNF Association Boards at both the state and national level and holds a pharmacy degree from Massachusetts College of Pharmacy and an MBA from Western New England University. To my immediate left is Joe Mitchell. Joe has served since 1996 as the President and CEO of Summit Care, which operates 14 Florida SNFs, including 2 Omega owned Florida SNFs with an additional Omega SNF under construction. Joe has served as President of the Florida Healthcare Association, is a CPA and holds a bachelor's degree in accounting from Florida State University.
Our panel discussion today will principally focus on the operational policy and performance trends in the SNF industry. But first, I wanted to take a few moments to recognize the vital daily role that these SNF operators perform in caring for the frail and dependent elderly among us. Perhaps never was that role more evident than during the crises presented by Hurricanes Harvey and Irma late last summer. Despite personal storm recovery facing most staff, their dedication to resident safety, both on-site and during any required evacuations, was a testament to the caring efforts occurring daily at SNFs across the country. Just for the 4 operating companies represented on our panel today, 33 SNFs were in the paths of the storms, 8 were evacuated and 20 lost power.
I'd like to ask each of the panelists to share a quick comment or a story about their staff's efforts during these storms. Perhaps you could start, Mike. Sure.
The key element to these types of things is just to be prepared. And we've been in business for a long time and have a great group of people that plan start their planning in May each year for the hurricane season. And so by the time the storms were on us, we had buses sitting in parking lots. We had extra food stashed in different locations and a lot of us scattered throughout the state ready to jump in where we needed to be. I mean, I was personally on the road for 7 days during the storm and just jumping in and out of situations that we needed to go into.
But it's a huge team effort, and it takes a lot of pre planning on the front end to be able to come through it as well as we did this year.
Excellent. Yes.
Fran? We had 3 buildings affected, 1 in Louisiana and 2 in Texas. And again, like Mike, the key to our success is the staff we have in our buildings. These people stay in those buildings sometimes 4 to 5 days without going home. We had one building in Lumberton, Texas that was became an island and we couldn't get to it.
But we ran out of we were running out of food, we were running out of the prescription 6 days later. So we had the opportunity to bring in food by boat and prescriptions by helicopter because you have to get creative. But what most importantly was our entire staff stayed in those buildings to care for those people and knowing that they couldn't get home and couldn't get to their own families. So it's really a testament to the kind of people that work in our industry.
Jim? Sure.
Yes. Irma was such a huge storm for us. It was massive. Comments that have already been made are very applicable to our situation as well. Probably the biggest thing is you prepare.
We prepare all year long. We do drills. We do communication. We do a lot of preparation, but you don't know what's going to happen during. And that's the threatening thing about it.
You really have to have a team. You have to have an infrastructure in place. Little things like being able to drive from one point to the other, being able to evacuate. You can't just simply load these patients up in a nice Greyhound bus and transport them. You've got wheelchairs.
It takes the one facility we had to evacuate required the physical therapist and the therapy team to assist. And I mean, it was an everybody pitch in type environment to be able to get them. We were very fortunate in our case because we had to evacuate one facility, and we happened to have a brand new facility that was half full, was 180 beds and happened to have the one that was being evacuated was 90 beds. So we were really fortunate. In fact, we were worried they wouldn't go back.
But we had 90 extra beds. In a lot of cases, what you find happening is that people have to evacuate to a cafeteria or something else. And of course, the thing that the threats that you're really worried about or what's going to hit the news and how that's all going to happen. But a lot of there's an awful lot of preparation that goes in. There's a lot of commitment at the facility level.
The administrators that we had at our facilities are very dedicated, and we try to support and encourage that. But I think preparation and you probably heard about some of the national news events down in Florida with the one facility. The one thing they don't tell you is they don't tell you how many facilities did a really good job. And we all had to participate, and we had that outcome. And of course, nobody wants to tell that story.
But there's a lot of effort that goes in, and it's a result of really good planning, coordination with the Association and execution on that at that level.
Thank you, John. Barry?
Yes. I mean, unfortunately, in the news, you mostly hear about the negative situations. But like these gentlemen, we were fortunate to see an opportunity for a lot of folks in our industry, not just in our organization, step up and do some pretty heroic things. And so we were fortunate to only have to evacuate one facility. We had luckily, we were on a priority list to have buses ready, and it is a monumental effort to do that.
They evacuated about 2.5 hours away from Victoria, Texas to San Antonio to one of our sister facilities. But we were fortunate in our other eight facilities that were affected by the storm in the Houston area to not have to evacuate and we had plenty of supplies to make it through. We are also fortunate to have the opportunity for our staff and our team members to be able to be an evacuation site for a lot of folks that needed help. There are those few cases where some companies aren't as prepared. And luckily, we were in a position to be able to help to be an evacuation point for hundreds of residents, some that arrived by bus from the kind of Port Arthur, Beaumont area in the middle of the night, 2 in the morning.
We had a hot meal ready for them and warm beds ready. And that's been the case that was the case at several of our operations because of their preparation. It's a pretty fortunate thing to be able to see our folks step up and be able to help at a time like that.
Thank you, Barry. Yes, this is just an example of the fact that these people operate 20 fourseven businesses. This is not just a widget factory that they can shut down in the face of tragic events. You've got to take care of people around the clock. And that's the real crux of what they do, and I congratulate them for it.
So I've prepared a number of questions that just like to have the gentlemen field. After the conclusion of this discussion, we'll have plenty of time for questions, as Taylor indicated. So I'll start with the first one. As we look at the changing reimbursement, regulatory and operating environment for SNFs, what are your guys' near term same store strategies for revenue growth and margin growth? And I'll start over here with Barry.
Sure.
Yes, I mean, we so we've been a public entity since 2007, so you can kind of follow our story a little easier. But we have kind of predicated our business model on being a kind of a turnaround specialist. And we have a focus on local leadership. We try to hire a CEO caliber leader in every operation to make local decisions. We don't force down corporate level decision making because this is a very localized, very personal business model.
I mean, these are operations that generate 1,000,000 of dollars in revenue and have a couple of 100 employees at each location. And so they need a CEO caliber leader to lead these operations and make sure the right business decisions and care decisions are made locally. And so what we found as we infused that type of a model in these operations, We continue to have great success in taking underperforming even operations that are losing money or may have a cheers or may have a kind of a poor clinical reputation and fuse good sound leadership into that operation and let them execute a business plan with world class support behind them, world class IT systems and resources and organization, We have found that that's been a very consistent and proven business model for us and will continue to be one for us well into the future. We even in the face of reimbursement, reimbursement uncertainty, which I don't think there's a whole lot of that with the announcement of PDPM anymore. But that continues to be our strategy.
We see continued revenue growth and margin expansion opportunities just executing our model the way it
stands. Can you address how quality factors into your operations and where that feature that aspect?
Yes. I mean, obviously, quality leads everything, right? So in the models that are being introduced both at the Medicare and Medicaid level, you're seeing a trend towards quality based incentive programs, quality based reimbursement programs. So which means essentially these government entities that are also in lockstep with what managed care has been doing are effectively rewarding the operations that are focused on outcomes. So being able to have that as kind of the leading focus of when we go into a turnaround operation, that's usually the story.
There's clinical challenges and you compound that with maybe low reimbursement in a particular state or another. Unless you've got the clinical operation aligned to what the outcomes need to be to capture the right reimbursement, you struggle. So that's our focus and making sure that that leads what we do. It's making sure the outcomes are there.
Thank you, Barry. Joe? Sure. To the extent things might be different for your organization?
Or Well, no, he actually could have given the same speech to some extent. The yes, we're very focused on the local market. If you were to ask me how am I going to compete with the headwinds of Medicare and all of the challenges that we have, it really is at the local individual facility, making them competitive and giving them the tools to be able to compete with others in that market. A lot of that, just to drill down on that a little bit, is we're focused on I just think people pay attention to it. And I can tell you now that the reimbursement is recognizing the STAR system.
Like it or not, Medicare or CMS has a star system. And so we've tried to really concentrate on that to make sure that we have and right now, we're 10 out of 12 eligible buildings or 4 or 5 star. But it is takes a lot of effort to be able to do that, and that is partly the result of the quality as well. Satisfaction surveys, sampling the customer base and trying to get that kind of feedback. We did a thing, and there may be some others here that on the panel that have done it as well.
Some a couple of years ago, we went and attended a I was at Disney Institute Customer Relations Management Program. And when I went, I thought, well, this is going to be ridiculous. We run nursing homes. They run Disney World. I mean, how am I going to learn anything from them?
And it turned out to be extremely beneficial to the point that we ended up developing a whole program out of that. And now we have competition in and amongst the facilities for the best customer relations board and rather a facility that's able to compete in that. And the idea basically is to develop culture that is customer friendly. I mean, some of the some things that you would just think are simple when you look at the hotel and restaurant management that don't necessarily translate or carry over to medical environment in a skilled nursing home. But those are some of the things that we've done.
The other point that I would make for us anyway in Florida is we've been very active in the association efforts, the lobby efforts. We're a partner with the government. If you think about it, we've got 60% of our occupancy is Medicaid, 20% plus, 25% is Medicare. So we are partners with the government, like it or not. And so we see our role as being very active in that at that level.
And both that from my standpoint is both Florida and a national involvement, and that has a lot of implications for
So advocacy really has to be a part of your strategy as well to ensure appropriate reimbursement on the state level and federal level.
And one follow-up comment on that. You asked about quality. Actually, what's happened in Florida is they've had the biggest change in reimbursement in the last 30 years. And I can tell you I was there when they did the other one, but another discussion another time. But this one is very strategically tied to quality points.
And there's some debate about how the quality is measured. There's different interpretations in the metrics that are involved in all of that, and that will continue to evolve. But again, same as what Barry was saying that the reimbursement is really driven or geared towards outcomes, and I'm seeing that at a local level. Again, the star rating plays into that.
Thanks, Joe. Fran, how about some of your strategies?
Well, very similar. We focused on quality about 3 years ago and trying to make sure that we could impact all of the components that affected our 5 star rating. And we think we've done that pretty well. One of the other ones that we our board and I articulated, we want to reduce our turnover rate. We wanted stability and leadership in our facility.
So over the last few years, our administrator and the DON turnover has been less than 7% 6%, respectively. So we've gotten good quality people. We bring them in. We culturize them, as I call it, into the Nexeon philosophy. And then we make sure we support them, as Barry said, with world class support behind them.
But getting stability in the leadership in a facility is when you're right, you give these people the keys to a $4,000,000 operation and say, we'll see you next Wednesday. What happens between today and next Wednesday? Is their leadership and their skills. So stability has really proven to be a significant advantage to us. And that has translated down into stability and less turnover at the staff level.
So we think that was a real good strategy that we initiated 3 years ago. It's paid some dividends for us. We do everything else. We work hard in every state to maximize Medicaid reimbursement, but it's tough in states like Texas and Louisiana where we operate where they're giving you no increases or minimal increases to affect margin. But you can affect it by getting good solid leadership there every day performing well, making sure you have good surveys, making sure you have great customer service and making sure you got your best 5 star rating you can.
Has the leadership stability helped you also with turnover reductions amongst your licensed staff?
Because we
talk a lot about the
Yes. We are well below the national averages now in all categories in terms of turnover. And we attribute that really to the leadership of the facility. When you put a team together and you have a good leader in that team, people like to come to work knowing that the person is going to be there. They have the philosophy, the strategy and the understanding of what needs to get accomplished here every day.
There's support for those people. It's a good culture. It's a fun culture in a tough business, but it's worked very well for us. Very good. Mike?
Well, one of the things we discovered was that we'd had a lot of complacency that had kind of eked into the organization and settled in there. And we've had quite a few changes and I think improvements in our senior management team over the last year. We brought in a whole new leadership team for our clinical services. And what we discovered very quickly was that a lot of our Directors of Nursing and administrators in our homes had kind of gotten by with just, I don't want to take care take that resident in because they're sick and it's too much work. And so what we're doing is we're trying to drive the acuity of our residents in our homes up by going and doing better education and making sure that our nursing staff and our clinical leadership is prepared to take care of those higher acuity residents.
And what we're finding is that by being able to say yes more to our referral sources that we're getting called more often because we're not cherry picking through that. So one of the big areas is trying to drive that acuity up in our homes, which is going to result in better reimbursement. The second thing that we're doing is we've also brought in a new Director of Clinical I'm sorry, of the dietary services. And again, what we've found that we've kind of become over the years was almost like hospital type dining. It was just very clinical and cold.
And so we're going to be introducing fine dining into a lot of our homes now with available all day menus where somebody doesn't care for what's on the menu that day, they know they can always have a grilled cheese sandwich or a burger or something like that, which sounds very simple, but we have not been doing that in our homes. And so excited about that. We're also introducing some spa bathing programs in some of our homes where just the smallest things of having towel warmers and different things like that to make their bathing experience a little bit more pleasant, because you have to look at what your folks in your long term care environment have to look forward to on a daily basis. It's television programs, maybe an activity or 2, meals and baby. And those are really the high points of their day many times.
So we're trying to improve those things that result in a better quality of life for our residents.
You find that the services you perform for residents have evolved over time as expectations of residents have as well, especially even in your long term residents, much less your
short term?
It's certainly going to. I mean, we're in the early stages of a lot of this, but we certainly expect that. I think the expectation and the ask is going to continue to increase, not just because we're starting to offer it now, but because of the group of baby boomers and people that are coming in to the segment over the next few years, they're going to demand a higher level of service. They're not going to be as comfortable with, we're going to drag you out of bed at 6:30 and feed you breakfast because it's convenient for us. That's not going to fly for very much longer.
A follow-up question for each of you is, how would you say that you differentiate yourself operationally from your competitors, if you haven't already covered some of that. So we'll start over here, Mike, with you.
Yes. I did cover quite a bit of that. Operationally, we are doing a lot of some of the same things these guys were talking about here. We're making a lot more team decisions and group type environments where we're getting not only the senior management team involved in decisions, but both the regional and the homes and trying not to dictate so many things from the corporate level, but to make sure that we are meeting the needs and the desires of the individual markets within Texas. Texas is so big that every corner of it is like a completely different state.
There are meal preferences. Everything is completely different from one segment of Texas to the next. So we're trying to do more regional menus and dietary and trying to make more decisions for the homes based on their individual markets.
Okay. Fran?
I talk a lot about culture in our company, and I think that's our differentiator our denominator because culture to me is what is the facilities culture and how best can the leadership in that building develop their niche and their programs to best serve their clientele. So we give them a fair amount of freedom to do that as long as they understand they work within some parameters. So it's a teamwork approach. It's everybody owns the success. Everybody works to make every single facility successful.
And we think the culture of how we have managed and performed with our quality initiatives, our customer service initiatives has really bear some significant fruit. We're above average in every state we operate with all of our quality indicators. It's a reflection of the people we have in the facilities that drive that. They own that quality. And that's our culture, getting it at the lowest possible level of the CNA that comes every day and says, I'm going to do a quality job today.
I'm going to make sure that my residents get the best possible care they can get. And that's made a difference for us.
Empowering each staff member to do what they think is right for the resident is kind of the baseline for care. Absolutely. Good. Good. John, Any differentiator speed?
Yes. So one of our main differentiating ideas is to build a brand new building with Omega. That's one of our strategies. So yes, I mean, obviously, having new product is has a lot of traction in the market. Probably the thing that we've experienced mostly has been that each market is significantly different.
I've got facilities in North Florida, facilities in Central South Florida, and they're totally different markets. Even within that are close to each other, they can be different. So being able to work within each unique market and recognize that there are differences, same thing really that Barry said earlier is we try to let the leadership develop at the local facility at local level. We've tried some we are working on staff retention benefits to continue to attract staff is a challenge at any don't have to be 1 in every market, but we want to be better than we were last year. Don't have to be number 1 in every market, but we want to be better than we were last year.
And that's a little bit of a visionary thing that we try to develop. And the other thing I find, too, is that frequency of visits, frequency of involvement. We bring our administrators. We have 3 different regions, bring our administrators, DONs together quarterly to be able to have meetings. And some of that is just to be able to interact and exchange ideas and do some team building from that standpoint.
Again, I would agree with the statements that have been made. Culture is vital. I think stability and recognition by the community that you've got stability and that you are able to you've got a reputation, a good reputation, that, that has a lot of value to making it competitive.
Gary, I imagine your concept of creating CEOs out of facility administrators is one of your true differentiators. You have others you'd like to mention?
Yes. I mean, it's a big question, strategic differentiation. And it's probably a better question for our local operators. I mean, that really is it. If I had to boil it down to a couple of things, it really boils down to our CEOs at the local level really dictate what we do and that's where our growth comes from.
They even decide on the acquisitions we do and what markets we grow in. And so I think our kind of cluster driven, they're divided up into groups of 4 or 5 and they decide how to grow and what talent to bring on and where to expand and they also hold each other accountable as well to because the question of differentiation is really it's an individual question based on what each leader is seeing in their marketplace and how that develops. But that is the differentiation for us as those leaders decide that. They dictate that for us and it's been a proven model for us. It's given us a good track record of success.
When you put that decision making in the hands of those that impact the care, it one of our core values is and this may sound controversial, but it's customer second. And we really allow that focus on the employee and our folks leading to permeate throughout the organization and dictate what direction we go. And for us, it's been something that has allowed us to in environments like this where you have a lot of operators fleeing for the exits, this is the perfect time for us to grow because those are exactly the types of assets that we want to take on. We're on a mission to change the industry and change the reputation and we believe our local leaders can do that.
Yes. And the strength of the industry depends upon the empowerment and the dedication of the staff that are providing that care to residents. So I understand that philosophy. A lot of discussion in the industry surrounds headwinds that the industry has been facing. And some of the tailwinds that we've all expected to help us a little bit revolve around demographics.
Are any of you seeing any impact from aging demographics so far in any of your markets? Or is it still fairly flat?
Fairly flat. We don't see any significant demographics change yet.
Mike, same? No, not yet. Okay. And you guys?
No, I mean, the interesting thing that you saw between 2011 2017 is you saw 2 key demographic categories either remain flat or tail down. And towards the end of I mean, that's the 75 to 79 population stayed relatively flat and the 80 to 84 year olds tail downward. And as a result, as an industry, you saw our occupancy drop by, I think, 5 percentage points or something depending on what data you look at. And so that's created a lot of the turmoil over the past many years. Towards the end of 'seventeen and into 'eighteen, you see those trends changing dramatically and you see them continuing to change in a dramatic fashion as the baby boomers are just now getting to that age where we see them with a lot of health challenges in our setting.
And if you look at the outlook for that over the next 10, 15, 20 years, there's this dramatic kind of spike happening. So that's exciting. I mean, that's we're building our organization around what those trends are.
And We just wanted to see what kind of impact you guys might or may not be seeing so far. I know Matthew is going to address this significantly in his presentation. Another one of the trends that's interesting is Medicare Advantage. A lot of talk about how that's Medicare Advantage Networks have driven down length of stay for Medicare beneficiaries as well as payment rates and potentially census by moving people into lighter care settings. Where do you see those trends for length of stay and rates and so on going for your Medicare Advantage payer populations?
Jeff, I can go ahead and comment on some of that. I mean Medicare Advantage impact for us has not been significant. We've seen some growth in it, some penetration going from about 7% to 12% increase over the last 4 or 5 years. But there's a lot of variables. We're talking about demographics.
In Florida, it's a little more unique, I think, than some other states. We've got a fairly significant high population of age. There's 23% of 20,000,000 people that are over 60. I think 1 in 20 in Florida is over 80. And a lot of what we're finding is Medicare Advantage is having the impact from our standpoint, but not significant from what we see.
But the other things that we do deal with are we've got patients now that go directly home instead of coming to for short term stays or some of that interaction, limited return to hospital. There's a number of variables that we're finding that kind of play into that. Quite honestly, our occupancies overall, just to go back to that for a minute, have been fairly strong. We've not seen we've actually seen increases in some of the markets that we're in. So it's been pretty stable.
You find more admissions as a result of perhaps shorter lengths of stay to keep the occupancy levels up?
Negligible for us. I mean, 22 days down to 21 point something. I mean, it's not that much in other short term stays. And I do know nationally that's not the case. I know that it has decreased more significantly nationally.
But and I will say, obviously, it's Medicare Advantage is a challenge financially to operate with. So we do have to kind of look at cost management when we have that. But we have not seen significant penetration in our market.
Fran, how about near 3 states?
Louisiana, we've seen very little activity. Texas, we've seen some. Colorado, probably one of the biggest change we have. Length of stay has come down. We see a lot more issues with bills and payments.
Medicare Advantage programs don't pay their bills on time. They pretty much in our company are probably in the 45 day payment terms versus the 30 day they say they contract with you. They are much more intense in terms of their strategy to move the patients home. One of the significant complaints we have in our Colorado building is we go home too soon. The families complain about that because they're trying to drive that.
Again, their incentive is to get them out of your building and get them to lower payment source. So it's been a mixed result. I mean, I think from a quality perspective, we're managing it, but we're feeling the pressure that we've got to give them as much care as we can provide in the shortest amount of time to allow us. And that average length of stay in Colorado is about 14 So that's not a lot of time when the average Medicare A patient is still staying in the 21 days. That 7 day period of time is significant.
Families have been unhappy with that. We see a lot more admissions on a Friday and a lot more discharges on a Friday. So they're moving people through the system because that's their incentive. So it's a challenge, especially when it comes to the payment side.
Are you noticing any of the shorter lengths of stay creating increased rehospitalizations?
Yes. And a lot of that happens post discharge. So again, we're tracking those people for 30 to 45 days post discharge. They go home, they don't do well, there's no one there to care for them to the level that they've had in a skilled nursing facility, they deteriorate. And they fall, they get pneumonia, they get a cold, whatever, they end up back in the hospital, which causes not only us in the hospital to be reevaluated in terms of rehospitalization statistics.
So it's not the solution that we'd like to see. We'd rather see a longer length of stay and then be more stable before they go home. And we're working with them. We think we're making an impact on that because the customer service results and the rehospital data is showing that these patients do have a tendency to go back quicker.
And we know how much that rehospitalization escalate costs. Mike, how about in your organization?
Yes. Fran touched on our biggest concern too is seeing some of the rehospitalizations because that's going to reflect on us. If they pass through our facility on the way home and are taken out too soon and end up back in the hospital, that reflects back poorly on us. As far as penetration, we are in so many rural markets. I'm not seeing quite as much penetration as we are in some of the larger cities.
So it hasn't had a real big impact on our company overall. But definitely, in those larger cities where they're in the Advantage plans, the length of stay is getting pushed down.
You probably have more experience in Medicaid Managed Care than you would probably Medicare Managed Care as we'll get into Medicaid in a minute. Gary, how about some of your experiences?
Yes. I mean, we've seen about half a day a year downtick in length of stay over the past 6 or 7 years and to the point now where we're down around 16 days on average, which is just below the national average. And but we've with that, we've seen a more than commensurate increase in volume on our managed care days. So, obviously, the managed care or the Medicare Advantage business is trying to achieve efficiency. So we're fortunate to have to be in states like California, Arizona where this kind of wave hit long ago and was kind of more at the leading edge of this movement and the shift from Medicare to managed care or Medicare Advantage.
And so we've been able to kind of take that knowledge and history and roll it in across the organization and be able to take advantage of the wave that's happening. We've also seen an annual uptick in our rates with managed care about 3% to 5%, as well as an uptick in volume as a result of managing length of stay downward, which it will continue to compress for probably the next
few years. It's also been positive that CMS has recently announced almost 4% increases for Medicare Advantage Programs that they're going to pay them. So that should be helpful on downstream. Yes. Rewards
the again the outcomes, if you're managing what they're expecting you to and be a more efficient operator, you're going to have more volume opportunity.
Are you seeing any advantages from Medicare Advantage Programs pushing people out of hospital sooner such that it might positively impact your SNF admissions?
Pushing out of the hospital sooner, pushing to home health quicker, sometimes skipping the skilled nursing setting. Not so much that it's impacted our skilled nursing operations negatively, because I think there's probably enough of the sick population to obviously, it is borne out in our occupancy numbers. But yes, you've seen it impact the whole spectrum of care. Fortunately, we're in the Home Health and Hospice business too. And so we've seen a positive impact from that in our Home Health segment as well.
Yes. Thank you. On the Medicare fee for service side, of course, at the end of last month, CMS came out with a long awaited proposal for the new, what's called now, the patient driven payment model to replace the rugs based system. I'd like to get your guys' thoughts on initially, I realize there's a lot of deep digging everybody has to do to see what the impact might be on operations, but what your initial thoughts are on the financial and operational impacts of this rule in replacing the existing RUGS payment system?
I can comment on that, Jeff. Yes, I'll start off. One of the things we're doing right now is we're modeling, best we know on the patient care driven model simultaneously with the census that we have in Medicare to see how it compares. And what I can tell you from our standpoint is that it is going to take us it takes us more out of the driver's seat and then puts us more into the I think it's going to be more cost management from our standpoint. The way the model seem to be developed right now is it's more front loaded.
You will get a larger fee in the beginning, and then it would taper off more quickly. So there's obviously some intent behind that. I think it's a change. We don't really know what's going to happen or when it's going to happen. They're talking October 2019.
So we're and to be honest with you, the latest updates that I've heard on that whole model is that CMS actually is moving away from that and looking at more to hybrid. So we don't quite know where it's going to go. But right now, our approach is to basically model it and look at and compare it to what we're doing with our existing population to track and see where it's going to take us.
At least it's a relief that you've got more than a year to figure it out if, in fact, it does come into play after 2019. Yes, it does. Any comments on it, Fran?
Yes. We think it initially, it's a favorable strategy, if you will, changes the system, it changes the way we're doing business. We're also modeling everything in terms of how you work with your rehab provider. There's less documentation required, which is again cost savings. It's one of the issues that was raised to CMS is the number of MDSs you have to complete, etcetera.
So there is some benefit from paper process. But again, it's too early to tell. It's a rule. It's been proposed. It's been attacked every day in Washington.
If you have talked to the lobby team last week at a meeting and there are a lot of people that are opposed to it. So I'm not sure when it will all come out and what it will all come out to be. So it's still a moving but I think it did offer some opportunities to do a better job and to get paid better on the fund side, which would be beneficial.
It should also be beneficial that a lot of the pressure from the OIG and the DOJ on some of these therapy claims and the emphasis on what they consider to be excessive therapy should be reduced, wouldn't you think?
Yes, absolutely. The whole therapy model changes dramatically. Mike, any thoughts?
Well, I think one
of our benefits is we own our own therapy company. And so it becomes a little bit of left pocket, right pocket. I think there's going to be a shift in not only focus, but some of the dollars probably shifting from the therapy side over to the nursing side. I don't know, a lot of speculation. The other thing that's going to be interesting is that it looks like it has the potential to eliminate a lot of documentation and paperwork that our MDS coordinators are having to MDS nurses are having to spend doing documentation and continually doing MDS after MDS and being able to do one upon admission that would carry that resident through most of their stay, that would be huge.
I imagine
it either cuts your staff costs for doing MDS and saves the margin money there.
We do. We spend a lot of money on paying our ends to do paperwork.
Now you
can get them out on the floor more. Exactly. Yes. Any thoughts, Perry?
Yes. No, similar. We've been fortunate to be a part of the panel at with American Healthcare Association working with CMS to help develop it. There are I think ACHA estimates at least $2,000,000,000 of administrative savings to touch on that point, which is a huge positive. I mean, ultimately, you shift from kind of a therapy focused reimbursement model to just a total care outcomes driven model that is not too dissimilar in philosophy from what CMS has been trying to do through the bundled care payment initiative, which we participated in for the last several years successfully and some of the value based models that managed Care has been we've been participating in with them.
So it kind of follows that same line of rationale. So we see it as actually it's tremendous news. If it does go through, it probably gives us what really will turn out to be some of the best visibility into reimbursement for the next hopefully 10 years or so that we've had in a while with all this noise around change and what's it going to be. This is a sustainable model that will reward the right behaviors. It's not just nursing, it's not just therapy, it's total outcomes, so and being efficient as a provider.
And we have in house nursing. We don't have a therapy company. It's in house. So for us, our teams have always been focused around the care and not just how to benefit one group or another. It's about what outcome we're trying to achieve.
So it's we see it as a huge, huge benefit this year. Okay.
We spent a lot of time talking about Medicare, Medicare Advantage and so on, but we all realize that more than 50%, in some cases, 60% to 70% of our residents are covered by Medicaid programs. In the states in which you operate, do you see any significant changes in the way Medicaid programs are implemented, operated or rates on the horizon, given that we've kind of escaped some of the congressional Medicaid block granting and per capita cap reform. Fran, any comments on that regard?
Well, I operate in Louisiana. So we're going to be out of the Medicaid business by the end of July. If you haven't heard of them, we gave out 34 1,000 eviction notices from the state this week. So because of a budgetary issue, but we're going to work we got that through the Senate yesterday. Hopefully, we'll get resolved in the House.
But the problem in the states we operate, Louisiana is driven by oil and gas. So oil and gas prices are low. The economics are not there to substantiate the improvements in the Medicaid rate. So it's a little bit of a challenge there. Texas, we've had managed Medicaid for a number of years with 5 major providers.
The only thing that changed there is they paid us much lower than they used to. Not really much change other than that. There is they're out to bid for the next round. There's now 25 bidders for that same line of business. We don't know what that will change in terms of Medicaid, but Texas, we've been creative with IGT and UPLs and all kinds of interesting things that are in flux as we sit here today in terms of where that's going to be.
But I said to someone this morning, it's hard to try to explain the Medicaid system to somebody who's not in health care because every state is different. Some are solid, some are good. Colorado is a cost based reimbursement state. We get great rate adjustments and if you meet the pay for performance indicators with quality, you get a kicker. So it just depends which state you operate.
In Louisiana and Texas, it's a challenged time right now. Louisiana is in a little bit more trouble than Texas. Texas, we seem to be making some progress with Crip and UPL. We'll see how that plays off. The states committed more money to that.
They've created they've lowered the standard for us to do freestanding participation in the QUIP program and not having a hospital partner, which gives you better incentive. The problem is whether the hospitals fund all that. So if the hospitals don't stay in the program, there's not the money through the IGT. So there's a lot of interesting challenges out there in those 2 states primarily we operate in.
Good. Mike?
Well, I'm actually very excited about this QUIP program because Texas hasn't had a just a stand alone Medicaid rate increase since 2014. So we've been kind of operating off the same playbook for many, many years. And with this quality improvement program that came out the 1st year started in September of 2017, we've been a nice beneficiary of that. It's measured off of 4 quality improvements on 4 basic areas. And when you're beating your benchmarks on that, there's additional dollars to go as long as the money holds out.
And what they're proposing for the 2nd year is more dollars in the fund and, as Fran mentioned, lowering the bar a little bit on what your Medicaid census is to be able to participate. So in a company that is heavily weighted on Medicaid, I mean, this could be a really huge thing for our company. So I'm very excited about that. And I think that it's got some staying power to it because CMS has been pushing Texas hard for years to increase their quality measures and their quality outcomes and stuff in Texas. So I think this accomplishes the goals of CMS when it comes to Texas and certainly Texas improving the quality of care for their residents in Texas, and it's certainly going to help those of us out that are taking care of the Medicaid residents.
So
Well, one of the challenges that operators in every state face is the requirements to meet regulations, but the potentially deficient funding to do so. So if they want to increase regulatory requirements or compliance issues, the funding needs to follow suit. So it's good to see Texas is
But the key indicator was that the quality has improved. The data has shown if you pay us more money and give us incentives that we have seen significant improvements in the full quality indicator category. So the governor has jumped on board now. So we finally have some leadership in Texas seeing some benefits here.
I think that the payouts have been something like 90%, something like 90% of payouts have been because of homes meeting those quality indicator improvements and stuff. So it's effective. It's working. It's happening.
Joe, you were talking about the new prospective payment system in Florida?
Yes. I'm actually pretty excited about it, to be honest with you. We've gone we've had the same system for about 30 years, and it was cost based, but it had a lot of limitations to it. Property was a very draconian formula that didn't reimburse much. I mean, it maxed out around $14 $15 a day.
People would get confused because they think, well, that's all dedicated to property, but it included property taxes, property insurance, home office cost. And by the time you go down, it wasn't much. The new system is prospective payment system, and it is it's complicated, as you would imagine, but it recognizes newer construction and renovations. That's one of the things the old system didn't do. So if you do renovations, you get reimbursed for it.
And that's a big difference compared to what we had in the past. I think that will encourage average facility in Florida is like 45 plus years old. So there's a lot of need out there for rehabilitation in the physical plant. That and then on top of all of that, we had the Senate approved and the governor approved $139,000,000 this year. It's a onetime event to help us with generator expense.
That's being done by giving it to us through direct care and direct care and some other components. So in other words, our Medicaid rates are going to cover a lot of the costs that we're incurring, which I think from a Florida standpoint, the one the difference is used to be you would if your cost went up, your rate would go up a little bit and have that potential. Now that's not true. So you've got to really watch your cost. Litigation is always a wild card.
You're trying to figure out what that is. But overall, I think it's going to be an improvement for Florida. And again, my experience, same as has been mentioned, is that you just can't forget that's a lot of our revenue base. It's fairly significant. So we're encouraged
and Well, as we see demographics improving, the Medicaid population because it is the lion's share of nursing home residents, It's going to have the biggest growth as well. So it might be dealing with access issues.
Barry, I
won't make you go through 15 states
with Medicaid things. Everyone will fall asleep now I'm done. No, I mean, like Mike and Fran, I'm encouraged by what's happening in Texas. It's a quality the underlying kind of foundation for the program is a quality based incentive program too, which is I think Fran mentioned this, it makes it kind of a more sustainable model for the future. We're seeing a lot of states adopt quality based component to their Medicaid program, which I see as a we see as a very positive step.
Probably in the bigger states where we operate, we have pretty good visibility in almost every state we operate in as far as Medicaid rates for this year and even into next year. And in California, we expect because of the quality based program that's in California, somewhere between 3.5% to 4% increase in our Medicaid rates. We see about a 3% increase in Arizona, which is another very large state for us. And the rest of the states, it's not too dissimilar, maybe not quite as large in some of those states, but somewhere around 2% overall. So it's a good outlook on the Medicaid side for us, especially now that the kind of this battle over block grants and Medicaid uncertainty has kind of subsided and been squelched at the national level, The outlook on Medicaid is pretty good overall.
Okay.
Earlier in this discussion, we talked about some of your same store strategies for growth. How about acquisition growth? What opportunities are you guys seeing for acquisition in your markets for consolidation or new markets? And what kinds of factors are you looking at? Barry, I know you talked about looking at troubled entities and turning them around?
Yes. It's interesting. Right now, it seems like everything is for sale. And so it's kind of a strange time. At both large and small, you see giant companies, some are well publicized that are being put out for sale and some companies have chosen to exit skilled nursing altogether.
So for us, that presents a huge opportunity. That's these are the times we hope for. It's we have a good leadership bullpen. And so we've had very kind of consistent growth over the years. It's something that's a part of what we do.
It's we don't have growth goals, but we grow when we feel like we're ready. And it's usually in kind of onesie twosies and most of them are turnaround operations. We're seeing pricing come in line a little bit better, although there's still some irrational prices out there and some are still paying, we think, irrational prices for that are overly burdensome for the operators they work with. But by and large, we see it as a pretty healthy acquisition environment for us. And we you've seen us do deals this year, and we'll continue to do deals throughout the year.
Mike, I know you're dealing a lot with restructuring and those efforts internally. Any opportunity to focus on potential growth in the future? And where might that occur?
On a very selective basis, the way we're looking at things right now is it has to have a lot of strategic merit to it before we want to take on an acquisition. It can be in a market that complements some of our other operations in the market or something like that would be attractive to us or something that is an opportunity, and we've got a few of these now that are potential rebuild opportunities down the road where you can go into a market that has a potential looks like it's going to be growing and not one of the slow dying markets in Texas and do a replacement home at some point in the future. So those are kind of the 2 areas that we would consider at this point.
Good. Frank? Well, we downsized a couple of years ago. We had another relationship with UpUp Garita. And we the lease expired.
They were not viable for us to continue. So we kind of took a step back. And now with Omega, with on the same store basis, we're going through all our assets to look at what's replaceable, what can be enhanced, what can be improved. And that's been a very favorable discussion, and we got a lot of activity going out there in terms of replacing buildings that are 40 50 years old in Louisiana with private room assets, etcetera, and trying to put some assisted living attached to that SNF and trying to build a little bit of a campus. We're also working with Omega on some other transactions.
We've looked at a lot of stuff. Again, it's got to be strategic. Got to be in the right markets. I think in Texas, we've been a little bit hesitant to grow because but that seems to be changing with the reimbursement model. Louisiana is a state where we don't see a lot of things for sale.
It's pretty much other than ourselves and 2 other big operators, it's pretty mom and pop business. And so we picked onesie twosie off, but not much in those markets. Colorado is extremely competitive for us. We always try to grow in Colorado, but so does everybody else. So we haven't been able to secure anything.
So it's selective opportunities.
Growing in newer markets is always a challenge because of the need for oversight management and adapting a lot of your policies to those new markets.
Yes. We have a transaction that's going to hopefully close this year that's in a new state for us. So we're excited about that. It's in a state that we feel very comfortable operating in. It's similar culture to the states that we operate in.
So we're looking selectively out there.
Very good. Joe? I'll start on that.
Yes. Well, we've opened a couple of new facilities, as I mentioned, and that's really kind of been the focus for our attention. It takes a lot of resources. We're a smaller company. What I can tell you is that the market in Florida is pretty strong.
If I was smart, I'd start selling. But no, I think the acquisition market has been very steady, and I think a lot of that's the result of the Medicaid and still the population demographics in Florida. So I think there's it's pretty steady. It depends on what geographic area and competition you're talking about. There are exceptions to that.
But overall, I think
it's Because you were able to take advantage of the state recently opening up the CON in
the last few years. Yes, that's a good point. I mean, we've got there was a moratorium on CON for about 11 years, and then they opened it up. And now they've approved about 30 buildings because you were there that they've contemplated, and it comes up every year about eliminating CON, which we think is a big mistake. And that has not we've been successful at keeping that off the table.
But right now, we do have about 30 new facilities that are being developed, and so that'll present. But we have a strong population. It's set to double in another 10 years from that
from those demographics. So the last general question because there's a lot we haven't talked about in the industry, and I'd like to give you guys each an opportunity to talk about the key challenges and opportunities that you face that we maybe have not already talked about, whether it's nursing shortage or something else that impacts your operations. Fran, do you want to
lead on? Staffing. Recruitment and retention is good, but a good economy has not always been good for our sector in terms of retention of our employees. I think there's a lot of pressure right now in terms of the economy that people are moving to other positions in other industries. Those are key positions for us Those are key positions for us.
They serve us well, but it's highly competitive to keep those people. So I think we're with a good economy, low unemployment rate, there's a lot of opportunities for people to move. So I think that issue of retaining and recruiting key people in the future is going to be a challenge for us.
Do you think the immigration debate could have an impact on some of your lower paid staff?
Yes, absolutely. We've always used that population to our advantage for sure. They're limited to come in. Now in Texas, we have a lot of what's called H21 visas come in, and that's been beneficial. But it's getting difficult, challenging right now to maintain the staffing.
I know it used to be you get a lot of licensed staff also from areas like the Philippines and so on, so it's restricted.
Yes.
Absolutely. Those open up a little bit.
Mike? Same answer. Same answer with the oil and gas business doing so well. They come in and hire these people in those roles. You're talking about CNA housekeeping roles, and it's very, very difficult to keep them.
Just the hotels in West Texas alone that used to be $120 a night to go out there and stay, they're getting $300 a night in those Hampton Inn's out there in West Texas now. So it's just it's unbelievable. And they'll come into housekeeping people and say, hey, listen, we're going to pay you $3 more an hour than you're making right now and buy you a brand new washer and dryer for your house and you just stay at home and do laundry for the oilfield workers. I mean, why wouldn't they take that? So it's a challenge.
The staffing, I think, is our biggest challenge right now.
What are your strategies for retaining staff in that regard? I mean, some of that you just can't defeat with money, but
Yes. It's not all It's not all about It's not all
about culture than it is
definitely trying to do some shifts in culture and make sure they feel more appreciated. But we did some simple things like go to a full blown PTO policy at the 1st of the year, where people are actually accumulating PTO time instead of having to be there for a certain amount of time before they can take it. They're almost immediately available to take their PTO time and stuff. And that's had a nice improvement in our turnover, too. A lot of these people that work in those positions don't come in to stay for 5 or 10 years.
A lot of them are in there 3 to 6 months. Anything you can do to try to extend that and try to get those people to see it as more of a long term career is beneficial. The PTO thing is huge. It's been huge for us.
We've done a program called purchasing power with a vendor where it's like you get online at Amazon, you're going to order whatever and it's all through payroll deductions to our company. The prices are competitive to what you can buy at Amazon, but they can buy it. They're preapproved for the product. They can buy a washer and dryer and deliver it to their house, and it will come out of their paycheck. And that's been a real winner for us to help our employees be able to enhance their own personal lives with buying things that they normally put on an 18% credit card.
We don't charge any interest rate, but it gives them the ability to go to purchasing power online, buy a washer and dryer, get it at that same price, not pay interest, and then it comes out on payroll deduct over a 12 month period of time. And they stay because they can keep doing that. And so that's been a real value added benefit for these low level employees.
Yes. Because 401 benefits are not something they can really take advantage of with their paycheck to paycheck kind of Yes. You know
what, in our four zero one we've made it mandatory that everybody's automatically signed into 401 because we had such little participation Because again, people don't put the money in, they don't save the money. So, yes, we're trying to give a what's the best thing if they got to buy a computer for their son going to college and it's $2,000 a CNA can't go out and come up with $2,000 They don't want to put it on a credit card, but purchasing power, we can sell it to them for $19.95 and it will take it on their page. It's been fabulous. Our HR found that to other companies in our space that have been doing it. It's been a great benefit.
Got
to be creative. Joe, comments?
Yes. Same kind of thing. Staffing is a challenge. We've had to deal with unemployment in Florida. It's it is a challenge.
We've been able to sustain fairly moderate turnover rates, which we hope is part of our stability. But it also depends on the area. You get down to like Sarasota, for instance, for whatever reason, that particular area for us is really challenging. I think there's a lot of other opportunities for people to do that. Staffing is one big issue, but litigation is also a main a constant threat and something that we have to deal with in Florida.
It's sometimes it's the volume of the cases as opposed to and it's in insurance is a challenge. So that's another area for us that is a big challenge.
Yes. Tort reform would be nice, wouldn't
it? Gary?
I mean, I'd have to agree. I mean, staffing is a big challenge for not just our sector, I think every sector. There's just low unemployment and lots of competition for jobs and wages going up. And so, for us, we again, this is where our local approach is important, right, because each of our operators decides different on a different strategy for how to retain and incentivize employees and they're given the freedom to do that. So we've seen some good success with our operators offering various different types of programs, again, depending on what their market dictates, either retention bonuses or sign on bonuses or programs where we're incentivizing them for their performance in what they do.
And believe it or not, you can incentivize a CNA and incentivize them on some key metrics and how they perform and be able to give them opportunities to improve what they take home. And I'd say that another key differentiator for us is we also offer ownership in the organization too. And all the way down to the C and A level, we've had folks receive ownership based on how they perform in their role and what value they bring to our organization and our leaders recommend different individuals for that.
Good. We're going to remain flexible to make sure there's opportunity for questions. So if when you ask questions, please make sure you don't ask any company specific financial data. That's not the purpose for this. But also, please make sure that someone can bring a microphone to you before you ask your question.
And we'll take the gentleman right here.
Juan Sanabri from Bank of America. Just I guess a 2 part question for the audience. Are the fundamentals in your view at this point any better or is the pace of deceleration slowing on mix shift length of stay occupancy? It sounds like staffing is still going to be an issue. In part 2.
Could you just give us any rule of thumb about how you think about CapEx and whether that's a per percentage of revenue or EBITDA or another way to think about it maybe is just what kind of EBITDA coverage do you need to have the cash flow to maintain your assets?
Jump in, guys.
I wasn't sure I got the first. On the CapEx side, we sit down and we look at our coverage ratios. We look at our cash flows. We look at what anticipated for rate adjustments, and we try to anticipate what do we need to finance or the capital improve over the course of the year. And that's done on an annual year by we have a calendar year.
So we're trying to do that in October, November, December. It all depends on cash flow. I mean, again, when state starts like for Texas, we went from getting paid for 7 days, getting paid 14 days. That impacted our ability to do some CapEx that year. I mean, it slows down your cash flow.
So we're doing it on an annual basis, trying to come up with a reasonable number for facility. And again, with Omega, we have been working very diligently with our assets to how we replace those and work on a repositioning of those. So a lot of the major capital expenses, we've worked transactions with our landlords.
So I'll make a comment about that. We have minimum CapEx requirements in our various lease agreements and sometimes the lender agreements. And they're usually around $3.50 to $500 per bed, which is really not an issue for us at all. We go through annual CapEx evaluation, and it's a continual process. Obviously, we have certain things that have to be done.
And if they have to be done, you get them done. But one of the things I like to try to do is I like to try to get ahead of it, and I like to try to do strategic planning for property plan improvement. And so we're usually working on several different projects. I don't have a defined set of margin for CapEx. Obviously, it's got to be available, but we're able to usually meet those things.
The one thing that's true in Florida right now is I we are all having to acquire generators. And so generators are about 250,000 per facility. If you had to start from scratch, a lot of times it's modifying what you already have. So Florida has got its own CapEx program right now. But again, like I mentioned before, legislature has provided funds for that.
So it's something that we're
not concerned about. And Juan, the first part of your question was about fundamentals such as length of stay, census, rates and things of that nature, correct? Yes. Garry, any comments?
Yes. I mean, I think I commented on that a little bit earlier. As far as our specifics go, I mean, our length of stay is, again, it's been kind of a steady trend downward of about half a day a year. And we've seen our case mix obviously has increased year over year. We've seen a shift, pretty steady shift from Medicare, traditional Medicare to managed care.
And we see that shift pretty steady and continuing to shift that direction. But we've seen a commensurate uptick in our volume. So our occupancy and skilled mix has improved and so has our rates have improved as well as we've proven ourselves in performance. And that's usually a kind of a 3% to 5% number we see in the increase in rates. As far as CapEx goes, for us, it's we're public.
So you can I'd refer you to there to get detail. I mean, we spend tens of 1,000,000 of dollars a year on CapEx, but that's a relative question. We typically have a target and but we shifted as we need to and but cash flow isn't an issue on that point for us.
And Mike, you don't deal as much with Medicare as maybe some of the other volumes as some of the other guys do. But Medicaid, obviously, is a really critical part of providing. What about your fundamentals from the long term side of census and rate? You've talked somewhat about rates, but maybe about the Sensus side in your markets?
Yes. We've certainly seen some downward pressure in Sensus over the last 3, 4 years, kind of steady, slowly whittling away at it. It seems to have kind of plateaued now. I don't feel like we are sinking on our senses. I think it's pretty much plateaued.
We our portfolio of homes and the markets that we're in, we're not a large rehab player. We usually, as a company average around 10% on our Part A. So we're not in the markets that are achieving higher Q mix than that. And we've really not seen a deterioration in that at all. I mean, it stayed pretty steady in there.
What we are finding is that there have been opportunities for us, as I pointed out earlier, to capture the higher acuity level residents through more training and just by saying yes and bringing them in and making sure we can meet their needs of course, but and being able to operate in those higher levels and stuff, which has driven our Medicaid rates overall as a company up. So I feel like we've kind of hit a plateau and are kind of positioning ourselves for the good things that are coming next.
Do you think it's possible that the Fran, for example, that the new PDPM could incentivize you to take a different kind of resident than you otherwise might take if the reimbursement is more productive for
the To be determined, yes. I mean, there's more incentive to take a higher acuity versus just looking at the fractured hips, the knees and the stroke. So the new program has more clinical capabilities and the higher clinical complexity of the patient population. So yes, that could change it. That could change it.
We haven't seen any we're pretty flat in the last 12 months on our Medicaid side. Our Medicare side has been uptick a little bit. But again, it's seasonal. So we'll see what happens in the next quarter. So it will be interesting.
Okay. Other questions?
This is Dan Bernstein, Capital One. I want to ask about Managed Medicaid. I mean, you talked about Medicaid being 50%, 60% of census. What has been your experience with Managed Medicaid? I know in some states as well like Florida, there's going to be some sunset in the no harm causes, right?
I think the network can narrow. So what has been the experience there? And then on the CapEx, as we move towards the PDPM and higher complex care, do you have to invest more in your facilities to take advantage of that retraining of personnel for that 1st day assessment? Just trying to understand what costs are going to be maybe to your facilities or maybe as an industry basis, if you can answer that, what kind of costs are going to be needed to take advantage of PDPM?
I can comment on the Managed Care Medicaid painfully so. What I can tell you is that we've had it for about 5, 6 years in Florida. And this past year, Senator Negron, President of the Senate, initiated an effort to review it. And basically, the question was, you had this many days 5 years ago when you took over, I can't remember the exact number, but you still have the same number of days now that you're that are in skilled nursing. What's different?
All we've done is added another layer for the payment system. It really didn't go anywhere legislatively. It ended up fading out, but it was a good question. It's something we're real frustrated with in Florida, but we have not seen a lot of difference in terms of the way that it has dictated our census or anything else. The main thing is that it's increased our accounts receivable collections.
And that's and it's increased my business office staff and the whole area from a cost standpoint, but we've learned to manage managed care from that standpoint. I'm not sure I see it changing a whole lot in the future. One of the things that we did get in Florida, which was nice, is that we have in statute that the Medicaid rates are basically in statute, and so they're not subject to negotiation. And that has given us some level of protection.
Was the delay in paying by the Medicaid Managed Care Organizations a onetime change that occurred at the time they took over? Or has it gotten worse over time?
It's gotten worse over time. Yes.
Required you to borrow more on working capital lines or
Yes. That's we're always finding and actually, there are some good actors and bad actors out there. And there were a couple that were really a house of cards when they even took over. And they were not functioning very well. So we've been able to get some state legislative attention on those.
But and you're right that they're at the end of a 5 year period right now for renewal. I'm not sure where that's at right now. But for the most part, everybody's learned to live with it, and it is just got longer periods for collecting AR. Yes.
I mean, we've been through several shifts from traditional Medicaid to managed Medicaid in many states now. And I would say the only real lasting impact is well, it's not a lasting impact. It's more of a short term impact as cash flow. Just the AR issue, it creates some short term drag as because a lot of these managed Medicaid providers aren't equipped to handle the volume and so they get into it thinking they'll function fine and they have an administrative nightmare on their hands and they just can't process the billing and get payments out effectively. And that's we've seen that in Texas for sure as well.
But in states where it's very mature, it's been in place for over 10 years like Arizona and others, it's fine. It's a system that works fine. And in fact, it's more efficient than how the government does it. So it adds an element of accountability and usually a quality slant to it too. Trying to remember, your question about PDPM and the rollout there.
So there's a couple of things that the committees that are working with CMS are doing to try to minimize the amount of brain damage associated with the new reimbursement rollout. One is adopting the ICD-ten coding system, which should be minimized a whole new system of codes to figure out. The other is the government has promised to roll out a software package that will be free to the operators to help them with the billing and coding. So that's a positive. That also tells me that this will probably not happen in October.
If the government is developing a software system, I mean, you can do the math. I mean, to say that they're going to have a software system developed by then and rolled out across the country, I would probably guess that means this whole system is going to kick into at least 2020. There will be some training associated with it for sure. I mean it's going to be a major shift for most operators in the space, especially ones that haven't been involved in alternative payment models and bundled payment and some other things where there's a different folks that shift. But no matter what, there's going to be some training.
But there isn't necessarily a need for CapEx expenditures to
No, not really. Could there be an opportunity
though if you were to want to, let's say, take vent patients or something to put action at the bedside or something along those lines?
Yes. I mean that's if you want to participate at a whole different level, I'm guessing. But yes, I mean in those cases then sure, but I don't imagine CapEx to be a major function. Maybe some just operational investment is probably the only major thing you'll see.
Any other questions? Yes, sir.
If you
can wait for your microphone, if we can get that over there. Thanks.
Yes. Tayo Cusoneo from Jefferies. The question I have is, about 2 years ago, Omega also had a very similar Investor Day. There was also a very similar panel of operators. Everyone talked about everything that we're doing to meet challenges in the skilled nursing space.
Between now and then, we've seen a bunch of operators go bankrupt. We've seen a bunch of them kind of ask for rent relief or rent deferrals and things of that nature. So I'm just curious, again, over the course of the next 2 years, why should things feel any different? Like what do you feel has kind of changed in the last 2 years that makes things better rather than it's still going to be very difficult, we're still going to be seeing bankruptcies, etcetera, etcetera?
I can comment on a little bit on that. I mean, look, I think the bankruptcies you're seeing aren't really a function of the environment, the reimbursement environment or the regulatory environment. They're a function of the deals that have been made, just overpayment for buildings. So the balance sheet issues that have led to mass bankruptcy and companies divesting out of the space are just because they're in it at such a level from a rent standpoint that it's not sustainable. We're all still here.
And I think it's probably because we have REIT partnerships like with Omega that are reasonable and allow us to go through some downturns like we've seen. Again, the census across the industry took a nosedive over the last 5 years. And if you don't have any wiggle room in your rent structure or your capital structure for your organization, you can't sustain a downturn like that. If you're conservatively capitalized and you pay attention to your balance sheet, we saw a slight downtick in census over that timeframe in about a year's time there. But we didn't struggle to survive because we have a conservative balance sheet and we're structured to navigate through those changes okay.
So the good news is, when you look at the future, why is it different? I can't remember a time over the last 15, 16 years that I've been involved with Ensign, where we've had this kind of clear visibility into what rates are going to look like. And that coupled with what the demographics seem to be indicating in terms of what we're seeing in occupancy growth, at least for us, that makes us feel super comfortable about the direction we're going. You never have 100% visibility into where things are going. You don't have a crystal ball, but those trends are positive.
Brent, any comments about
you guys recently? Yes. We restructured a couple of years ago. I mean, we try to we disposed the underperforming assets in markets that we didn't think were strategic to our company's success. So that's taken a couple of years to flush through the balance sheet.
So that's behind us. I think the reimbursement strategies that we're seeing are favorable. We haven't talked about regulation. I was with our Cliff Porter, our Chief Lobbyist at American Health Care. He told me he had a meeting at the White House.
He was amazed at how assertive they want to be with helping us with some regulation issue, replacement or elimination. And so I think there's going to be some movement in that area. So I think we've as Mike said, I think we maybe have been at the bottom in the last couple of years. So again, I'm a privately held company. It's my company.
It's my balance sheet. It's we're lean. We don't have much debt. We're going to add things that bring accretive solutions. And bigger is not better.
And so I think that all of us at this table realize that you can be very successful in this business by paying attention to the basics. This is a block and tackling business. But you got to have a partner and I think Omega is and for me and NexGen has been a fabulous relationship and a fabulous partner and allowing me to grow my business, working with me to grow my assets, making sure they can help me. Where I can't capitalize stuff, they can help me replace a building. So I think it's that kind of partnership that this organization has allowed us in our company to be successful.
And Mike, I think in the course of your restructuring and retooling and looking inwardly to develop new management protocols and address the needs now of your residents and markets. Do you think that, that has been a very healthy restructuring exercise to allow you to look toward growth in the future?
I think it's been huge for us. I think it was well needed, and I think that our performance and stuff is beginning to show it. And so I think we're poised to do nicely in the next few years.
One last comment I would make is that some of the downward pressures in occupancies, I understand it was like 86% went to 82% nationally, actually gives us a little bit of support in terms of trying to defend against Medicare cuts. We're now set for 2.4%. We're in October. There's some concern out there that we could end up with cuts for pay fors for other programs, that kind of stuff. But that kind of information, even though it's negative, ends up being positive for us in terms of depending on our increases.
Any other questions? We have a question over here and microphone, Mike. Sorry.
Sure. Todd Stender from Wells Fargo. Revenue growth is challenged, wage inflation, you guys all addressed, so it suggests operating margins are pretty challenged. If Omega were to come to you with a new lease, whether it's an existing tenant like an Orianna or another opportunity in a different part of the country, what type of lease would you be willing to sign, whether it's rent coverage, annual rent escalators, particularly looking out over a 15 year term?
We yes, I mean, we I've got the leases right here. Yes. We, of course, like to own real estate whenever we can, but we like to do leases as well. And for us, a starting point for a lease really should be in the 1.45 to 1.5 coverage ratio arena. And that's got to be a starting point, we believe, for kind of a healthy lease into the future.
With escalators that are probably somewhat CPI based and capped somewhere near 2.5%, 3%, And that's kind of a general lease structure we're open to. The more aggressive coverages down in the 1.3%, 1.2% arena, I think, are not smart to do. We just don't we don't do those.
Yes. We're actually talking about transactions with Omega, and that's pretty much in the parameters we're talking about. Again, what's a win win situation? I mean, again, they know us as a good quality operator. They know what we can do and we've had a 15, 18 year relationship.
And so let's set up the parameters in the beginning of the transaction that we know are sustainable for as much information as we know for the next 2 to 3 years. So I think there is some good dialogue there. They've always been open and honest about those issues. And we've always felt very good about saying this is what we need to make our success going forward. Because again, we don't know if they have a coverage ratio and they have an escalator every year, we don't know what the escalator is going to be every year in Medicaid or Medicaid.
So that's the wild card for us. So we want to make sure that you position that transaction in the beginning that you think can be successful for at least for the next 5 years. After that, it's pretty much a wildcard.
I was just I think you meant 1.5% annualized quarter, didn't you?
Yes. We like that better. Yes. I thought I missed it. You got to leave some upside for Omega in there.
All right.
He's in California. He's getting a 3% rate adjustment. Yes. He's not tax exempt.
I said CPI based, all right.
All right. Fran, you said something earlier that I found interesting, which was you think that the reimbursement environment lobbying was more positive. Can you tell me what you think about how receptive the administration is to raising reimbursement rates at least on the Medicare side and what the industry is doing to lobby for better rates?
Well, I used to run the political action committee in Washington for about 12 years. And I would tell you that we spent a lot of time educating and hopefully getting some champions in Washington. But I think that the environment right now is that under the current administration, they invited us to come to the White House. This is what I'm second they invited us to come to the White House and said, bring every regulation you'd like to have us eliminate. And Cook Forter said, if I got a tractor trailer, I would have had to pull up to the front of the White House.
We gave him the 1400 pages of the rules of participation. We gave him the 3 day hospital stay. We gave them all of the bureaucratic issues that cost us a lot of money in terms of how we operate. So I think that from a regulatory perspective and with CMS, you're going to begin to see some changes. Things have been postponed, but no major changes have come.
So I think regulatory wise. On the lobbying effort, again, I think people are realizing that we as an industry employ a lot of individuals in this country. We are an economic engine in most of the states that I operate in and most of the counties and parishes that we operate in. And people need long term care. And that we've done a good job that I think under Governor Parkinson's leadership, we have changed the parameters of what this industry's quality
is.
I will tell you today that I can stand here with my colleagues and say we are the best quality we've ever been in this industry in the 25 years I've been here. So I think the quality component is driving will drive our reimbursement. And so I think we're well positioned in Washington. The problem in Washington is what's a pay for. So we got to be make sure that we don't get like and we got hit in a call this week.
They want to reduce our 2.4 because they want to put more money into opiates because CMS wants to do that. So we still got some challenges within the CMA infrastructure of those people because they're not political. They're going to say the politicians will be gone next year. So we're going to still implement our own strategy. So I think we're well positioned.
We've done a lot of work with CMS. We've done a lot of work with the government and the administration. So I think we're going to see some good stuff coming out of this administration next year
or 2 years. So the margin improvement is not just about rates going up. It's also about reducing expense burden and cutting the improving the bottom line from that.
Yes. I mean the industry is saying that the average SNF corporation in this country has a margin of less than 1%. That's not sustainable for CapEx. That's not sustainable long term. And so I think people are beginning to believe that number.
So but we've had improved quality as that margin has deteriorated. So I think people are willing to put funds back into the system.
We got one from the e mail, and I think we're probably going to have to wrap it up. And it's regarding the push to cheaper home health services. It's really a 3 point question. What's your view on this and how it's impacting your business? What are the initiatives you're putting in place to mitigate this trend?
And if you had to estimate, what percentage of your volume is potentially at risk as of now? Thanks.
Well, we're deep into home health. We operate in 15 states in home health as well as maybe 16, 15 or 16. And we see as a key component, I mean, not just as an opportunity for new business, but also as an opportunity to shift to a lower cost reimbursement setting and to help partner with our SNFs to help reduce readmissions as well, which will be a key component of our reimbursement as we roll into the future is minimizing that costly readmission number. So, we don't see it as a threat per se. We see it as a nice complementary business to what we already do.
I would agree with that. From Florida standpoint, we've got a population of about 23,000,000 in Florida, actually, 70,000 to 80,000 patients statewide in nursing homes, which is not very much. If you think about the age population, it's a very small number. There's a lot of demand out there, a lot of alternatives. And I think, particularly in Florida, I think we need those alternatives.
And it hasn't really affected, and I don't think it will affect our census at that level.
Yes. I know I read a recent well, MedPAC puts out a report every year that talks about the distribution of hospital discharges, for example, to all the 4 post acute care sites, and it's been remarkably consistent over the last 7 or 8 years in terms of the percentage going to SNF, the percentage going to Home Health and percentage going to IRFs and LTACs. Are you guys seeing the same thing? Or are you seeing some intrusion into your census by diversion to Home Health from hospital? We're not seeing a
lot of intrusion. I think Home Health plays its role in the spectrum of care just like the SNFs do just like the hospitals do. And forever, there's been a push to the lowest cost setting and to be able to manage those patients in the appropriate setting. And I think appropriate is the important part of it here. And I think the challenge is going to be making sure that the residents are the patients are cared for in the proper setting.
And that setting is not driven purely by cost. And so I think that's the real challenge is, do we have people that are being taken care of in the home that really need to be in a facility? Absolutely. There are people that are being taken care that are staying in assisted livings far longer than they should be too and really should be in a step and need that higher level of care. So it's a challenge to make sure that the decisions are made and the right people are involved in those decisions as to where the best place of care is.
And so but I don't see it as a huge threat. We don't have Home Health Care in our portfolio. I don't see it as a huge threat. I do think it plays an important role in the whole spectrum of care.
Do you think with the degree of or the number of comorbidities and ADLs that are required of residents that are currently in your homes now that there is a segment of that population that could be cared for at home? Or do you think that, that might be difficult to accomplish? And that would address the risk part of that question.
Well, yes, I mean, that's the point, right, is that we don't I think most of us don't see it as a threat to our business because our patient population is sicker and sicker. So there is a limit to what we can even what we can do in the home setting when you've got folks with multiple diagnoses of and some real challenging health issues, there's only so much you can do safely in the home. So that's why we see it as a nice complementary business to what we do, because we'll be able to partner well with our home health partners and manage the care from acute to long term care or post acute care and then on to home health.
Well, I think we'll wrap it up. And thank you to Mike and Fran, Joe and Barry for all of your efforts. And I hope the audience got some benefit out of it. For crying out loud, I went half an hour over. So let's see.
Time to have a break. Thanks, Robin. Good. Yes. Thank you.
Hello. Yes. If we can start making our way back to our seats, I'd appreciate it. We'll start again in a couple of minutes. Hello, Bunny.
We picked it up. All right. The last ten people who aren't sitting are going to be off to leave. How's that? I'm just going to start the presentation and people can start taking their seats.
How's that, right? For the 7 or 8 of you who are listening to me, thank you. Thank you. Thank you very much, Matthew Demchick. Good afternoon.
Thanks, everyone, for coming today. Thanks, firstly, to that panel for really adding a lot of insight and thankfully not contradicting what I'm about to tell everybody. So I appreciate that. For those of you who don't know me, my name is Matthew Gormond. I'm the SVP of Investor Relations here at Omega.
And thank you very much for coming. I know there's a lot of things going on in REIT world this week, so it means a lot to us that you've taken time out of your week to join us. And hopefully, the information we're providing is valuable to you. I'd also like to thank the New York Stock Exchange for allowing us to host this meeting in this wonderful building, in this iconic setting. I, as a person growing up in the UK, could never think that I would be up here at such a wonderful place.
So half of England is probably watching on the webcast based on this. So a couple of other housekeeping points. Number 1, I know not everyone was able to get their fleece size. So if anyone didn't get the fleece that they were looking for, just e mail me and we'll send you your fleece. That doesn't apply to people on the webcast, right?
You have to come here to get the fleece. And again, the same thing with the Q and A. We'll open up to Q and A in a few minutes. But if anyone has any Q and A they don't want to ask, I've got my e mail here and I'm happy to take any questions from that as well. All right.
Final thing, we're going to be focusing obviously on the SNFs, the SNIF environment, the SNIF operator. But it would be remiss of me not to remind you that along with our SNIF portfolio, we're also owners of over $1,500,000,000 in senior housing assets. Right now, the investment community seems not surprisingly focused on the SNF portion of our business. So we're dedicating our Investor Day to that. But we're hopeful that as some of these SNF concerns dissipate over the next few months or years that investors can start focusing on this valuable and growing portion of the portfolio.
I'm going to move to the final thing that we have to get out of the way, which is the legalese. So I'll highlight the legal disclaimers around any forward looking statements made in this presentation. Comments today that are not historical fact may be forward looking statements, such as statements regarding our business and portfolio outlook generally. These forward looking statements involve risks and uncertainties, which may cause actual results to materially differ. Please see the materials provided today and our filings with the Securities and Exchange Commission, which identify specific factors that may cause actual results or events to differ materially from those described in the forward looking statements.
All right, let's get on with it. So there are two purposes of today's presentation. The first one is to look at the factors that have been driving operating performance in recent years and to try to take those factors and to evaluate what's likely to happen to operator performance in the future. So what I hope to show in this presentation today is that, number 1, the headwinds that have been impacting operators are beginning to slow number 2, that the tailwinds from demographics are beginning to help and number 3, even using a pretty conservative assumptions on most of the factors, we expect this combination to result in an improvement in operator performance metrics going forward. Now we're going to show this in the form of a model.
So as we go through these drivers, we're going to come up with some assumptions as to how we believe each of these drivers will trend going forward. Whether you agree or disagree is up to you. But the good news is we're going to give you the model along with the presentation and all the backup support around our numbers on this pretty little thumb drive as you leave today. So we'd encourage you to take that, to look at the model, to look at our assumptions, to play with it, to put your own assumptions in, and that will allow you to see how you see trends going forward for our operator performance. So often, to know where you're going, you have to know where you've been.
And our operators have been in a tough environment in recent years. Not taking into account the bump in 2011 on the back of the RUGS IV implementation, It was pretty steady for a number of years, and then coverage started to decline in around 2013. While the decline somewhat flattened, it has continued to bounce around those lows in recent years. And we believe this can be determined by 2 factors: 1st of all, occupancy and secondly, a challenging reimbursement versus growth environment. So before we start analyzing these two factors, I'd like to highlight one additional thing.
The majority of the analysis today is based on Medicare and Medicare Advantage. There are a number of reasons for this. Firstly, while Medicaid makes up the majority of our revenues, much of the change in operator performance has come from Medicare. If you look at the economics of each payer system, you can see that given the profitability of Medicare, any hit to it has a disproportionate economic impact on the SNF as a whole. From a logistical standpoint, the federally funded Medicare information is better aggregated and therefore allows for better analysis.
And finally, many of the factors influencing Medicare also influence Medicaid, especially demographics, which obviously influence all payers and senior groups. So as you can see from this graph, industry occupancy has declined significantly in recent years. For a low margin business like this, a decline in occupancy from 85.5% to 81% will obviously impact your business, especially when a disproportionate amount of that decline has come from the more profitable Medicare side of the business. We put this decline down to decline in occupancy down to 4 main factors. Firstly, a migration from Medicare to Medicare Advantage secondly, a reduction in discharges from hospitals thirdly, unfavorable demographics and finally, a decline in the length of stay.
So let's have a look at each of these factors separately. The first factor is migration from Medicare to Medicare Advantage, and this slide shows that migration going back to 2,009. Over that time, Medicare Advantage penetration has increased about 10% from 24% to 34%. Now given that the average length of stay for Medicare Advantage patients is about 12% shorter than for Medicare patients, this migration has created an occupancy headwind. During this time, the migration to Medicare Advantage has been quite steady at about 1% per annum.
So for modeling purposes, we're going to assume that this rate of migration continues. The second factor is the reduction in hospital discharges. Note that I'm not saying the reduction in discharges to SNFs as a percentage of total discharges, just an out and out decline in hospital discharges. So you can see that since 2,009, the number of discharges from hospitals per 1,000 beneficiaries has declined by 17%. Now there are a number of factors behind this, but one significant one is the increase in observation stays.
You can see that since 2,009, the number of annual hospital discharges has come down by 974,000. At the same time, the number of annual observation stays has increased by 845,000. So for those of you who don't know much about observation stays, it's taken some time to understand what they are and why they could impact the capacity for a person to enter a SNF. When a patient enters a hospital, they can either be admitted as an inpatient or they can be put under observation status. As you can see, when a patient is admitted as an inpatient, they are covered under Medicare Part A and therefore receive a higher reimbursement rate.
However, there are constraints. Since 2013, there has been the 2 midnight rule, where a patient basically has to stay in hospital for 2 nights in order to qualify. In addition, as an inpatient, there are increased risks of claim denial and increased penalties for readmission. With observation status, you get a lower reimbursement rate, but the risks are lower as well. And while it should take no more than 48 hours, this can be extended.
In addition, if the hospital decides you're admitted under observation status, the patient cannot appeal it. So the real impact for both the patient and the SNF occurs when the patient leaves the hospital. If they were admitted as an inpatient, when a patient is discharged to a SNF, Medicare Part A pays 100% of the costs for the 1st 20 days and 80% of the costs for the following 80 days. If they came into the SNF after an observation stay, the patient themselves will be responsible for 100% of the room, board and nursing care, while therapy, drug and ancillary will be covered 80% from day 1. Clearly, this makes it cost prohibitive for most people to enter a SNF when they've been under observation stay status in hospital.
One misconception we hear all the time is that the reduction in occupancy is due to a lower discharge rate to SNPs as alternatives such as home health aids take share. As you can see, this is not the case. In fact, discharges to SNPs have actually moderately increased in recent years. So if you go back and look, you can see that while hospital discharges declined significantly since 2,009, you can see that the decline started to level off around 2014. Between 2014 2016, the annualized decline was 0.9% And based on conversations with operators and administrators, we believe this impact has continued to moderate.
Therefore, for modeling purposes, we assume an 80 basis point decline in occupancy due to lower hospital discharges in 2018, with that decline moderating by 10 basis points per annum thereafter. So in a minute, we're going to look at the positive impact on Medicare enrollees that will come from the baby boom. However, nobody dwells on the baby bust that directly preceded it and that has been providing a significant headwind to census in recent years. In the top graph, you'll see the annual birth rate from 19 oh nine to 1980. You see around the start of the Great Depression in 1928, the birth rate started to decline and it remained low for more than a decade.
In order to try and demonstrate this headwind, we look to the average number of people who should be between 75 87 years old for each individual year based on that birth rate data. We know that is the age cohort that is the sweet spot for SNF utilization. So any change in that cohort represents a good proxy for the headwinds facing SNFs based on the baby bust. And as you can see from the second graph, the industry has faced a pronounced and prolonged headwind beginning in around 2002 and just starting to inflect in 2017. I would note that actual Medicare enrollment didn't experience such a dramatic decline due to other factors such as baby boomers between 6575 years old, partially offsetting the decline in those over 75 as well as an increase in life expectancy and other factors.
But nevertheless, the headwind from the decline in birth rates has been quite significant in recent years. Now if we take that bottom slide and roll it forward, you can see what this tailwind is expected to look like from the aging of the baby boomers. Now you can see that's pretty significant. In terms of expectations going forward, thankfully, this has been pretty much done for us. As many of you know, we engaged Avalere to perform various data analyses for us, and one of them was to project future SNF utilization based on forecast Medicare enrollees and SNF utilization by age.
Now this only looked at Medicare. We know that Medicaid patients tend to run a little older. So for modeling purposes, we basically lagged the growth by 3 years to reflect this. Length of stay was another area of surprise as we were going through our analysis. We've heard before and today about how length of stay is declining and we know CMS is incentivizing SNFs to shorten length of stay without diminishing quality of care outcomes.
So we were surprised to see that based on annual Medicare enrollment and care data, the average length of stay for Medicare patients has only declined 4% from 2,009 to 2016. The decline in Medicare Advantage length of stay seems more significant, an 11% decline between 2,004 2017. But I would note this data is less robust as due to CMS not processing Medicare Advantage claims, there is not an equivalent aggregate data. So this data is based on information provided by a basket of our operators. It represents over 150 facilities, but I don't know how much you can extrapolate it to a national level.
I would also note that the average length of stay in our Medicare Advantage basket has remained relatively flat between 2016 and 2017. And this aligns with what we're hearing anecdotally from our operators. While insurance providers are still continuing to look to reduce length of stay, they're reluctant to push too aggressively simply because the quality of care results materially deteriorate below a certain point and that the insurance provider is financially responsible for funding the resulting rehospitalization. In addition, SNF's local reputation and potentially its referral rate are hurt by elevated rehospitalization. So both insurer and SNF are likely to be somewhat judicious with further length of stay reductions.
As a result, this is one area of the model where we adjust historical trends to reflect the reality of what we know in the market. The decline in Medicare length of stay has averaged 0.1 days per annum since 2009. We think this is likely to increase and we choose to model a more conservative 0.5 days annual decline going forward. Equally, we think the 0.8 days in annual decline experienced by Medicare Advantage is unsustainable and therefore temper this decline to 0.3 days per annum. The net impact of this is that we model a slightly more conservative decline than the data would suggest.
We just weight that somewhat differently. In addition to the occupancy headwinds Sniffs have been facing in recent years, they've also been dealing with a challenging cost environment relative to rate reimbursement growth. So here we have the per patient data per patient day data for our core SNF portfolio, and you can see that revenue growth has failed to keep up with cost growth on a per patient day basis. Now some of this comes from the migration from Medicare to Medicare Advantage and the resulting decline in per patient day reimbursement, but the majority of it comes from the fact that reimbursement growth has just failed to keep pace with cost growth. In fact, a 0.2% annual shortfall is actually quite admirable in the circumstances and shows what a good job our operators have been doing in managing their businesses.
So what do we expect going forward? Well, the most recent increase of 1.8% when you account for the expected value based purchasing discount is actually quite reasonable and suggests CMS is aware of the challenges operators are facing. However, as we also heard today, labor costs continue to remain challenging, and we would expect that growth to remain elevated in the near term, so that will offset much of the rate increase. For modeling purposes, we're going to assume that cost growth exceeds rate growth by 80 basis points per annum for Medicare, Medicare Advantage and Medicaid for the foreseeable future. Now given the historical average differential over the past 5 years has only been 20 basis points, it's a very conservative assumption.
But in a few minutes, you'll see why we've chosen that. So this slide just aggregates all the assumptions we've discussed so far, so we won't waste time revisiting those. Also adds a couple of assumptions down the bottom. 1st, given the increase in census stemming from improving demographics, we increased our variable costs to reflect the higher occupancy. The variable cost per patient is about 25% of total cost or about $54 per patient per day.
So as census increases, we model the increase in costs to reflect this. The second thing to note is no benefit is assumed for either cost reductions from the new PDPM model or a change in queue mix that is likely to occur when occupancy comes close to capacity. We've seen this anecdotally in certain high occupancy markets. When census comes to around 93%, the facility will hold back beds for the more profitable patient type. And given the low margin and high operating leverage, this can have an outsized impact on operating performance.
However, as I've said, we don't model this in our numbers. Also, I would note that our SNF portfolio does include a small portion of other forms of reimbursement, private pay, veterans, etcetera. These reimbursements tend to be similar in dollar amount to Medicaid, so for sake of ease, we've just included them in the Medicaid numbers for modeling purposes. So rather than try and go through all the elements of the model, I'm just going to summarize some of the information. You can go through the model to your heart's content later.
The 2017 information is pretty much a reflection of our average of the most recent core data. There's a bit of numerical poetic license taken. For example, our average facility has about 110 beds, but it helps to see some of the numbers and the changes in those numbers if we start with round numbers. And none of our changes has an impact on the economics of the model. You can see that we have a little over 82 residents with Medicaid making up the lion's share.
From a revenue standpoint, the breakdown is 60% Medicaid with the remainder split 2 thirds Medicare and 1 third Medicare Advantage. The per patient day reimbursement breakdown is rounded slightly, but is materially in line with what we spoke about earlier and the average length of stay is also in line with what we discussed. If you fast forward to 2025, the first thing that strikes you is occupancy is suddenly over 98%. Clearly, that's not sustainable. Occupancy tops are out around 95%.
But this model is to show you where trends are going rather than forecasting the exact likely scenario that is expected to occur. There are lots of things that will change between now and 2025, and we would dilute the impact of the core drivers of sniff performance if we try to second guess everything. The second thing that stands out is that despite total occupancy increasing about 20%, Medicare residents declined by about half a person per day. Even Medicare Advantage only increased by about 1.2 people per day. This is due to all the headwinds we layered onto both Medicare and Medicare Advantage.
I find it hard to believe that we could be 8 years into the baby boom cycle and that our non Medicaid residency will be effectively flat. However, this is due to the conservative nature of our assumptions. The third thing I would highlight is that in 8 years' time, we're assuming our per patient day reimbursement rates have only increased by 1.6 percent annually. It's a pretty moderate growth rate as far as I'm concerned. Equally, the length of stay has continued to tick down and has converged between Medicare and Medicare Advantage.
Again, what we've seen in recent years, these are conservative assumptions. So if we take these conservative assumptions and flow them through to the model, this is what happens to EBITDA coverage between now 2025. Coverage improves 40 basis points from 1.34 times to 1.74 times. Now you'll recall, we decided to model an 80 basis point shortfall between our per patient day reimbursement and cost growth rather than the recent average shortfall of 20 basis points. And here's why.
If we apply the 20 basis point shortfall and everything else stays constant, EBITDA coverage increases to 2.17x by 2025, and we know that's not going to happen. So as you can see, even with conservative assumptions as we've modeled, the combination of ameliorating headwinds and demographic tailwinds is likely to result in improving operator performance going forward. And we would expect that improvement will materially reduce the operator overhang that we believe currently exists around our stock. Despite all this good news, I would like to leave you today with a couple of thoughts to temper you this enthusiasm. First, the current operator environment remains tough.
Take a look back at that graph and you'll see that operating performance under the 80 basis points differential model remains challenging for the next 12 to 24 months. However, I would stress the challenging is not the end of the world. In the last 12 months, we've seen 3 of our largest operators experience financial stress. And based on where things stand today, the net rent reduction stemming from these challenges is likely to be around 1.2% of total rent. Not ideal to be sure, but not what you would conclude if you heard the questions we got in our various different investor presentations and based on what our stock price has done during that time.
Secondly, trees don't grow to the sky. We know that CMS will intervene long before our operators' EBITDA coverage ratio starts sporting a 2 handle on average, and that's fine. For a while now, I have been analogizing the skilled nursing business to the utility business. The government does not want to be responsible for your electricity, and they certainly don't want to be responsible for nursing the entire senior population. They would much rather outsource that business to the private market, and they will regulate that business to ensure that the private market has sufficient profit so they can continue to invest in their service for the betterment of the patient, also known as the voter.
But they do not want to see operators benefiting from outsized profits. Now that begs the question, where is that equilibrium? If you look back at our portfolio's EBITDA coverage over the past 12 years, it's averaged about 1.54 times. If rents are 10% of revenue, that implies an EBITDA margin, EBITDA without an R, of 5.4%. Given the CapEx, interest and tax obligations that fall below this number, that does not seem excessive and to my mind probably represents a pretty good proxy for that equilibrium.
Given the constantly evolving environment, it's unlikely that coverage will sit at that level for a prolonged period, but it does hopefully suggest that as the operator environment becomes more favorable, the operators themselves will get to share in the economic tailwinds. So there it is. That concludes the presentation. I know it's a lot of information to throw at you, but hopefully it provides you it gives you some understanding as to how we view the evolving SNF operator environment. So with that, we'll open up to any questions.
As per before, if people can wait for the microphone to get to them because it's being webcast. Thank you very much.
Yes. Good presentation there. What is the model most sensitive to? Is it the demographic shift if that doesn't happen? Or I'm just kind of curious what 2 or 3 things really kind of change the outlook based on them not kind of coming through as inputs?
I think the length of stay is a big one. I mean, 0.5, think about it, that's a big move. Clearly, the demographics is another one. I don't think the migration from Medicare to Medicare Advantage materially moves the needle. And then the cost differential between the costs and the revenues.
I mean, if you can see you put it at 0.2%, it really throws it off. So those are the big 3 movers, I think.
Matt, when you look at the decline in the average length of stay for some of these patients, how does it differ between different episodes versus people that have infections or hip replacements? How do those change?
We haven't dug into that yet. It's a very good question. It's something that's on my list to do. So I will get back. I will highlight one thing that one of the questions that we have been asking ourselves is, is there a capacity for Medicare to get down Medicare length of stay to get down to Medicare Advantage length of stay?
One of the things that we've seen is that there's actually been somewhat of a movement back from Medicare Advantage to Medicare as patients get older just because it provides them extra flexibility in terms of who their doctors are and where they can go in terms of hospitals and SNFs, etcetera. So that suggests that the acuity level for Medicare may be higher than the acuity level for Medicare Advantage. So that's the one thing we know we're questioning right now is whether we can even see that gap get lessened. But I actually don't know the details around per acuity, I'm sorry.
Hi. The model shows the coverage ratio inflecting starting next year. Is that just a theoretical exercise or is that something that Omega believes will happen in their portfolio?
I will answer it this way. Based on pretty conservative assumptions, it shows exactly 2019 being marginally better than 2020 again. If these factors stay the way that we expect them to and there are no factors that change materially that we haven't modeled, then I think that probably is something that we would expect. It's moderate. The increase for those 1st couple of years is moderate.
But as things start to improve thereafter and there's a further reduction in the headwinds and the consistency of those tailwinds because each year you have more and more of this larger baby boom come on and they keep aging. That's where the real rubber meets the road. So I think that that's probably where it is. The one if I'm being honest, the one thing that potentially could change is that there's some other factor that has remained consistent, like migration from SNFs to home health that maybe offsets it. But again, as the panel said earlier, the acuity level that exists within the SNF portfolio, if you just and one of the things we hope to do is have investors come around and have a look at the average SNF and have a look at the number of episodes or interactions with nursing help in a day, that really can't be done through a home health system.
It's a different level of acuity. They help each other, but they're not the same. But if you were to see an increased push to that, maybe that's a little bit of an offset. But I would say that with most of these things being relatively conservative that happens, you probably find half of these other things haven't been as bad as we model them. So it probably does stay where we're expecting it.
Does that help?
Yes. Matt, just a quick follow-up. Just based on that age range of 75 to 87, is the average age just a touch over 80%, is that the way to think about it? And do you have a sense of how that average age has changed over time? Has it increased like we've heard about in seniors housing to where it's in that particular product side mid-80s?
Has that changed over the last 10 years?
It has changed. It hasn't changed that dramatically. I would say that the average is about 82% for the Medicare side of things. For the Medicaid side of things, it skews a little older and hence we're modeling it a little bit older. But yes, what you've seen, you probably you've all read the same press cuttings that I have is that there seems to be a plateauing somewhat of life expectancy.
And so therefore, while there may be a continued migration upwards, the trend is probably going to be relatively minimal. Any other questions?
Interested if you stress test the model at all and in particular, kept everything constant but looked at that cost differential of the 20 basis points. And how much would it take just to give a kind of sense of magnitude, how much would it take to get that debt for coverages to stay flat, for example, offsetting some of this demographic changes?
You have to because all of those other things are incrementally improving, you have to increase that differential per annum. But probably, if you look at it on average, and again, you guys can play with it, it's probably going to come around 1.2%, 1.3% difference, which we haven't seen that for the data we have going back. Now clearly, at some point in time, if you start seeing such an improvement that you see coverage on average reaching 1.7%, maybe even before that, CMS is going to start using the relatively blunt tool of reimbursement rate to change that. But when I don't think that that's going to happen anytime soon. I think they'd love to get it to a more reasonable cushion around that 154 number that I was thinking would be somewhat reasonable.
And then they'll probably use that to offset the clear tailwinds that are going to continue for 10, 12, 15 years thereafter.
So not to put you on the spot, Matt, but not 100% sure. I mean, it's interesting, but not sure why you buy the stock today based on this ramp, which makes perfect sense. But do you think you could see yourself kind of updating this annually and putting in actual data and sort of following the base that you sat here or you're setting here and watching how it goes? I mean, if you do that, you keep people on the hook a little bit,
people like me.
So there are kind of 2 questions, that one. The first one is why you should buy our stock today. I'm more than happy to talk about that one if you want. But the second one, yes, you're absolutely right that I think updating this for our own edification, I'm going to be some of this stuff has 2016 numbers because of the time lag until we get to 2017 numbers. Well, I have my expectations as to what those 2017 numbers would be in order to conform with what we're expecting.
So as soon as those numbers come out, I'm going to be looking at them. And we are being very transparent. I mean, we're giving you all the data behind all of the stuff on here. It would be silly of me to do that and then to stop that transparency going forward. So yes, we're more than happy to share that stuff.
Did you want to hear about the why we should buy a stock today? You get paid practically 10% away, right? I mean, from that standpoint, I would say that to a certain extent where our stock trades today is really factoring continued challenges to the operator and very little, if no growth going forward. And I just think both of those are somewhat of a fallacy. I think that once you start seeing an improvement in the coverage ratio and this starts actually manifesting itself And then you should see a multiple rerating to a more normalized multiple.
We're at the low end of where we've traded over the last 5, 10, 15 years, no matter how far back you look. And at least on the normalized periods back in 2000, there were some obviously challenges and things like that. So you're going to get paid 10% away. We've got underlying rent escalators that are probably going to be able to grow our FAD over the next 4 or 5 years by 2.5%. So you're getting effectively a 9.5% bond with 2.5% escalators, not taking into account a multiple rerating, not taking into account the fact that we would expect to be able to generate more than that growth through accretive acquisitions, through various other factors.
So and in the meantime, you get paid nearly 10% to wait. So there's a brief answer to that one as well.
Matt, just a quick question. You talked about in the model a 5.4% EBITDA margin. What is that today? And could you give us a sense of what the EBITDA margin is?
Well, everything is on average, right? So I mean, some people are going to have great numbers. I think our portfolio is generally higher than the average SNF margin. And so if you say that our coverage is 1.34 and our coverage is maybe 10 basis points above the average, maybe even more, and you say that our rents are around 10% of revenues. So in that situation, if you've got a 1.5.4 coverage and you take out 10% or 1.3.4 coverage rather, you take that out 10%, gets you down to about 3.4% margin.
I mean, when you think about the CapEx obligations, TAC obligations, any interest that they may have on working capital loans, etcetera, That's pretty thin margin. Does that help?
Yes.
Thanks. Anyone else?
I just want to make sure you didn't make any assumptions on impacts from PDPM, behavioral changes or anything like that?
We didn't make any changes on behavioral. At this point in time, I don't even know what the behavioral changes are going to The one thing that I felt was pretty conservative is this general expectation. The PDPM is going to cut out a certain amount of costs around reporting requirements and that side of things. We didn't assume any of that either. So again, just want to be conservative on that side of things.
Anyone else? Okay, hold on. I should check. Should check if there's anything on the Internet. No, it's just my mother.
Can you email me the model? Yes, anyone that's probably a good point. Anyone who's not here, who's not going to get one of these pretty little thumb drives, email me if you want the presentation, the model and the support and I'll make sure that you get it as well. Thanks. All right.
I guess I've bored you into submission. Let's look at the time. All right. So it's perfect. In about 5 minutes, we're going to start congregating to head down to the floor of the stock exchange and watch the closing bell.
So
You can leave your stuff in the room here. And after the closing bell, we'll bring you back up. We have
Thank you very