The Impact of COVID-19 on the Nursing Care Industry: Threats and Signs of Recovery

Of all the industries most adversely affected by the global pandemic, the nursing care sector — comprised of both post-acute and long-term-care providers — has suffered greatly. The pandemic presented unthinkable operational challenges to the skilled-nursing sector in particular, resulting in significant adverse financial consequences. Despite these challenges, the sector has demonstrated continued resilience and modest signs of recovery that provide cautious optimism for the continued vitality of the sector.

Things were not all rosy for the skilled-nursing sector pre-pandemic. The industry was experiencing headwinds, including aging infrastructure, rising labor costs and turnover, payor pressure and increased competition.[1] With the pandemic came additional challenges, both operational and financial, which have had a significant impact on both revenues and costs. On the revenue side, the American Health Care Association has estimated that the skilled-nursing sector will lose an estimated $34 billion in revenues through 2021 due to COVID and the occupancy challenges it has presented.[2]

Not surprisingly, occupancy rates in nursing homes plunged from a pre-pandemic rate of 84.9% in February 2020[3] to below 70% on Jan. 31, 2021, with an average occupancy rate at that time of below 80% in all 48 continental states.[4] These declines were caused by a number of factors, including the ban on new admissions, a drop-off in elective surgery discharges from hospitals and resident deaths. Moreover, the ban on new admissions has caused a diversion of potential residents to home-health providers.[5]

On the expense side, the costs of personal protective equipment (PPE) skyrocketed during the pandemic, and some operators still struggle to attain adequate levels of supply. For example, “3M N95 masks had by far the largest markup in price from pre-COVID-19 days, jumping in price from $0.11 to $6.75,” a markup of over 6,000%.[6] Supply challenges remain, with some providers reporting ongoing shortages of PPE.[7]

Despite their heroic efforts to combat the disease, many skilled-nursing operators are bracing for COVID-19-related litigation. Although “COVID-related claims to date are limited,” insurance industry specialist Willis Towers Watson expects such claims to increase. “Many insurers are mandating the addition of a COVID-19, pandemic or communicable disease exclusion on renewals and new business.”[8] Willis Towers Watson has noted that COVID-19 has caused “massive market disruption in all facets of this market sector: coverage, capacity and rate.” Adding additional pressure on cost structures, Willis Towers Watson predicts that rates will increase in 2021 between 15% and 50%+ for general and professional liability insurance.[9]

Although some states have passed executive orders or liability-immunity laws that may provide some protection to SNFs from COVID-related liability, this state law patchwork has not allayed the concerns of providers, who are advocating for a federal liability-immunity law. The industry contends that federal legislation is needed because without prophylactic protection, providers face uncertain and potentially financially draining tort litigation related to their conduct during the pandemic.

An additional threat to the industry is the expected increase in federal and state scrutiny, if not knee-jerk legislation intended to address perceived abuses in the sector. For example, there are recent “reform” initiatives calling for a host of measures, including the banning of new licenses issued to for-profit operators,[10] and the limiting of executive compensation and company profits.[11] A more measured review is warranted for meaningful reform.

Such challenges are daunting, and two recent headlines underscore the financial peril some providers face. On March 1, 2021, certain affiliates of Consulate Health Care that manage and operate 140 SNFs filed petitions for relief under chapter 11.[12] Although the filing of the bankruptcy cases was explicitly “precipitated” by the partial reinstatement of a more than $250 million qui tam false-claims judgment, the debtors did note that its aggregate census at the 140 SNFs that are managed by the debtors saw occupancy drop approximately 14% during the pandemic “due to decreased intake volume from the COVID-19 pandemic.”[13] Moreover, despite solicitating 40 third-party lenders for debtor-in-possession (DIP) financing, the “process did not yield any indications of interest for financing … from third parties.”[14] Ultimately, the debtors concluded that a DIP loan from an affiliate of the debtor “was and remains the best available under the circumstances.”[15]

On March 2, 2021, health care real estate investment trust (REIT) Welltower Inc. distanced itself from beleaguered operator Genesis HealthCare (Genesis) by, among other things, terminating leases for 51 properties in an effort to “de-risk Welltower’s portfolio.”[16] On March 3, 2021, Genesis, the largest skilled-nursing operator in the country, announced steps to restructure its business, including a voluntary delisting from the New York Stock Exchange and a $50 million cash infusion from ReGen Healthcare.[17] Explaining the need for the restructuring (which follows a going-concern opinion in August 2020), Genesis’s CEO stated: “The severity of the pandemic dramatically impacted patient admissions, revenues and costs, compounding the pressures of our long-term, lease-related debt obligations.”[18]

But there is light at the end of the tunnel. On March 2, 2021, the Biden administration announced that there would likely be enough vaccine available in the U.S. to vaccinate every adult by the end of May.[19] This is welcome news to the skilled-nursing industry. Indeed, since the rollout of the vaccine to nursing care facilities, both the death and new case rates have dropped dramatically, greater than the national average declines. Specifically, for the time period between late December 2020 and February 2021, new cases in nursing homes have declined 80%, which is better than twice the number of declines in the general population. Similarly, deaths in nursing homes are down 65% over the same time period.[20] The vaccine is working. Without a doubt, the sector has been buoyed by the billions of dollars of stimulus money that has been provided through the CARES Act public health and social services emergency fund (Provider Relief Fund).^[21]

Acquisition activity, while subdued in volume, is showing resilience in pricing. For deals that did trade in 2020, estimates are of valuations of about $100,000 per bed, which is solid and in line with recent years’ valuations.[22] Investor interest appears to be driven by the need-based nature of skilled nursing assets, as well as the continued support of government payers.[23]

Further, there is evidence that occupancy is steadying, according to some providers. For example,  Wendy Simpson, CEO of LTC Properties, a health care REIT, said during a recent earnings call, “We do believe industry census is close to or has hit bottom…. As the current vaccines — and a third from Johnson & Johnson — become more widely available and utilized, visitation opens up, communities and facilities continue to aggressively market their services, and consumer confidence in these settings improves, we should see the current census stabilize and even improve.”[24] Moreover, it is likely that the skilled-nursing sector will recover lost occupancy quicker than other senior housing asset classes as voluntary procedure discharges uptick.

The skilled-nursing industry has weathered tumult over the years, but none as serious as COVID-19. Despite the operational and financial challenges many providers face, there is some evidence that the sector is recovering, which is long-overdue good news for the industry and, most importantly, for the most vulnerable cohort of the population among us.