Last week, the Center for Medicare & Medicaid Services released its 2022 fiscal year reimbursement proposal for skilled nursing facilities that includes a 1.3% boost to Medicare payments. The overall $444 million increase is substantially lower than the $750 million awarded for the 2021 fiscal year, noted an industry update analysis Monday from Mizuho Securities USA.

“While this is still a net increase on a year-over-year basis, it falls below expectations and could be seen as CMS setting the stage to begin to pull back the meaningful amount of aid that has been provided to SNFs during the COVID-19 pandemic,” Mizuho analyst Omotayo Okusanya wrote.

Worse still for skilled nursing operators, Okusanya added, is that CMS explicitly called out Medicare payments above its expectations with the new Patient Driven Payment Model system. The agency found that PDPM spurred an unintended average hike of about 5%, or $1.7 billion, in payments to nursing homes, and it noted that cuts are set to happen “as soon as possible,” for CMS to achieve its initial goal of budget neutrality when the new reimbursement system initially was implemented. 

The investment banking firm also expressed concern over recent efforts by lawmakers in New York to cap the profitability of for-profit SNFs, noting that the practice could become popular elsewhere as states and the federal government begin to implement additional regulations on SNFs in a post-COVID world.

“These developments do not bode well for healthcare real estate investment trusts that focus on skilled nursing, such as CareTrust REIT, Sabra Health Care REIT and Omega Healthcare Investors,” Okusanya wrote. “We don’t expect any earnings impact per se, but these developments could weaken rent coverage in the future, and increased tenant credit risk has typically negatively impacted valuation multiples.”