Mark Parkinson
Analyst · BMO Capital Markets. Please go ahead
Thanks, Wendy. And I appreciate the opportunity to make some comments about the sector in general. By way of background, I'm the President and CEO of the American Health Care Association and the National Center for Assisted-Living, which is the largest long-term care trade association in the country. We represent 10,500 skilled nursing facilities, almost 70% of them across the country and another 4000 assisted-living buildings. And in addition to my political background, my professional background is that my wife and I built, developed, owned and then operated both skilled nursing facilities and assisted-living facilities in the Midwest. I'm happy to make some comments about the whole COVID situation, the DC response and where I see this headed in the future. At the outset, it was very clear, eight months ago, that the COVID crisis presented both the most significant clinical challenge and the most significant business challenge that the sector had ever faced. On the clinical side, we have never faced a virus or a disease process that killed 15% to 20% of our residents who become affected, that infected literally hundreds or thousands of people, many of them living in long-term care facilities, it is a clinical challenge that we have never faced before. And on the business side, we knew that we had our hands full as soon as that Kirkland incident occurred and we saw what happened there, both on the census side and on the regulatory side, and then as cases started spreading across the country, we knew that from a business perspective this was going to be an enormous challenge. There were many unanswered questions back in March. Would the sector collapse, would residents flee the buildings, would the employees flee to buildings? And what we now know eight months later is that the answer to all of those questions is, no. The system didn't collapse, the facilities held together, certainly faced enormous challenges. But unlike facilities in some parts of the world where the employees literally did flee and the residents were forced to fend for themselves, our long-term care system has held it together. There were also multiple unanswered questions about the business side of this and about the congressional response. Would we receive the funding that we needed to keep going, how bad would the census situation get? And again, from the business side, would this completely collapse? And while it has certainly been bumpy over the last eight months, the answers to all of those questions have for the most part been favorable. Yes, there has been a devastating business impact that I'll talk about here in just a few minutes. But for the most part, assistance both from the federal and state level has filled in the gaps for many of the providers and allowed the business side, although quite bumpy, has allowed the business side to continue. There were clearly times as the markets were trading in March and April, were investors were betting on a collapse of the entire system and that clearly did not occur. So what I'm going to talk about today is I'm going to talk about three different areas that I think you may be interested in. First, I'm going to talk about the DC response on the skilled nursing side and where it has put the sector right now. Secondly, I'm going to talk about the DC response on the assisted-living side and where assisted-living stands. And then finally, I'm going to talk about what do things look like for the future for upcoming months post election getting into 2021 and where is this whole thing headed. Well, let's first of all talk about on the skilled nursing side. I think on the skilled nursing side, the report would be all good. The response at the federal level has really probably surpassed what most people thought would occur. Early on the help was there, but really not material. Some of those things that happen, for example, was a lifting of the federal sequester, the 2% cut that facilities, all providers incurred about eight or so years ago. That 2% cut was taken away through the end of this calendar year, and in a normal year, that would be a big deal, but in a pandemic year 2% really is not a material number. The next thing that occurred started to get close to material help and that was when, in the second stimulus act, the government provided some additional Medicaid money to the states through the FMAP match, which is just kind of a DC way of saying the feds are giving the states more money for Medicaid. Now, the states were given discretion on how to spend those funds. And in some of the states, there were material amounts of those funds that were provided to skilled nursing facilities, and in some states, there was no help at all. So whether the Medicaid increase and the FMAP increase helped a facility is completely dependent upon the state that it was in. But in some very large states like Texas, and California, and Florida, there has been help provided. Unfortunately in states like New York and New Jersey, there's been very little help. So whether the Medicaid increase was helpful or not is very much a business-by-business type question, and it's completely dependent on the state that they're in. If you're in California, if you're in Texas, it's extremely helpful. And I think that, it's important for you to know that this FMAP increase will continue as long as the public health emergency is in effect. It is tied to the public health emergency. The public health emergency is declared by the Secretary of HHS. They only have the authority to declare it for 90 days at a time. It was set to expire on October 22, but fortunately, we were able to get HHS Secretary Azar to extend it. It is now extended to January 22. And the FMAP increase is actually tied to the end of the quarter when the public health emergency ends. So if, for example, the public health emergency ends on January 22, the FMAP increase will continue until the end of the first quarter. We're pretty confident that we're going to be able to get the public health emergency extended again in January out until April, which means that this FMAP extension would occur at least through the second quarter of 2021. After those two things, there then began some things that occurred that were and are very material to the sector. One is that we received yet another rate increase on Medicare and there were no changes made to PDPM. We received that news on May 1 and that rule has now been finalized, which means that there's been another 2.3% increase in Medicare payments, but probably more important than the increase the fact that PDPM was not adjusted. And as you may recall, coming into the pandemic PDPM was looking quite well for providers and giving all of us a lot of hope about the future. The next thing that occurred was that CMS waived the three-day stay requirement that's necessary in order to skill a resident to a Medicare payment. Under the normal rules, as I'm sure you're aware, a person has to stay into a -- in a hospital for three days and then get discharged to a facility before they can become a Medicare resident. CMS waived the three-day stay requirement which has allowed providers to skill people without sending them to the hospital. It's been extremely important as folks have been diagnosed with COVID. We haven't had to send them to the hospital to skill them under a Medicare rate. And what it's done for many providers is that even though they have had a decline in census in their general population, because they've had the ability to skill Medicaid residents into a Medicare rate, they've been able to keep their heads above water. That three-day stay waiver is also tied to the public health emergency. So when we got that extended to January 22, we also got the three-day stay waiver extended to January 22, and we are optimistic that we will be able to get an extended another 90 days to April 22 as we approach 2021. The final two things that I want to talk about have been the most material help to the sector. The first is the decision by HHS to allow people to receive a Medicare advanced payment. HHS and CMS have the authority to provide every Medicare provider with a three-month advance on their Medicare payments. It's a material amount of money to any provider and virtually all skilled nursing providers took advantage of this in March and April. That immediately solved the cash problem that any provider would have. Suddenly having in your bank, three months of Medicare cash solves a heck of a lot of problems. Now, the challenge is that this is not a grant, it's a loan. And under the normal rules, this would have had this been start being repaid in August of 2020, a few months ago. Fortunately, we were able to get that extended so that the repayment now does not start until April of 2021 and when it does start, the repayment comes back on a pretty favorable basis. We believe that we will be able to get Congress to further delay the repayment of those funds. And there is even the possibility that's been widely discussed of Congress waiving the repayment of part of the advance not just for skilled nursing facilities, but for other Medicare providers, most notably hospitals, who are also lobbying very hard on this issue. And then the final area of help has been the most helpful, and that's been the CARES Act funding. The most significant lobbying victory we had actually wasn't any specific grant of money, it's when we were able to convince Congress on the first stimulus bill that the so called $100 billion hospital fund shouldn't just be for hospitals, it should be for all providers. That was really the pathway that we've had to the success that we have subsequently achieved. And the subsequent success has been a multiple rounds of money out of that CARES Act for skilled nursing facilities now totaling over $12 billion, and we believe that there is more to come. Those payments that have been made out over time, have solved a lot of the cash flow issues that providers normally would have experienced and we continue to receive those funds. Next week, for example, on Monday will be the first payment of $2 billion in additional payments that are being paid out to providers who are particularly successful in keeping COVID out of their buildings. When you add up all of these things that have occurred for skilled nursing facilities, whether it's the FMAP Medicaid money, the sequester or the CARES Act funding, the 3-day stay waiver, you add it all up and we believe that there's been over $20 billion in relief to the skilled nursing sector. What does that mean? Well, it means that those that thought that the sector was going to disappear back in March and April were wrong. It has not collapsed. And in fact, the cash position of most providers is as good as it would have been prior to the pandemic. I think that for the overwhelming number of providers when you add up all of the things that have occurred, they're in a pretty good cash position heading into 2021 and feel, I think, pretty comfortable that if we can get a vaccine in early 2021 and census can rebound that they're going to be okay. Now, there are still a number of providers, it's a minority, that it is a -- at sometimes a visible group who [indiscernible] and the basic profile of those is that they fall into two categories and often are -- unfortunately for them hit those. The first are companies that were struggling financially coming into the pandemic and this appears to be particularly the case of folks that were highly leveraged. They were struggling coming into the pandemic, it is probably exacerbated their problem over the last eight months. And secondly, facilities that happened to be in the northeast, which was particularly hit hard by COVID early on at a time when there was virtually no PPE, virtually no testing, the mortality rates were very high, those providers are struggling. They had experienced a loss greater than the national average of 10% or so. And so you will hear about some folks that are out there, and some of them are highly visible, that are continuing to struggle, but I don't think its representative of the vast majority of the sector. And my belief is that if we can get a vaccine by the end of this year, we'll get folks vaccinated in January and February, and census can rebound, the overwhelming part of the sector is going to make it through this. Let's secondly now talk about assisted-living. The news is not as good. And what I mean by that is we have not been able to achieve the kind of lobbying success for assisted-living that we have been for skilled nursing. I do think that there's some important breakthroughs recently and that there will be more successes down the road. I think a lot of people wonder, well, why in the heck has assisted-living not received the funding that skilled nursing has. And it's not because HHS doesn't like assisted-living or just philosophically doesn't think that private pay should be reimbursed, it's not because they believe that assisted-living folks don't have needs and don't have the same kind of problems that people that live in nursing homes have, it's really none of those things at all. What it comes down to is that the federal government doesn't regulate assisted-living, it doesn't know very much about assisted-living. HHS provides no federal funds to assisted-living and certainly doesn't regulate that. So when HHS was given the assignment to pass out what ended up being $175 billion in funds, it started working with the groups and the providers that it was used to working with, which did not include assisted-living. So as we were pounding the door to say, hey, assisted-living needs help as well, they were really saying, well, let's get rid of these Medicare providers first, and then we'll hear what you have to say. And they did that. They made some initial Medicare payments, and then they let us make our case and we were successful. We were able to eventually convince the policymakers that assisted-living needed help as well. But then we ran into a very unique problem. Because they don't regulate assisted-living and because they don't pay assisted-living any money, they told us, hey, we don't even know who the assisted-living providers are. We don't have a list of companies to send funds to. And so at that point, all of the long-term care trade association, ours and others, went to work and developed a database of all the assisted-living companies in the country, the buildings, the taxpayer ID numbers, et cetera, and began working with HHS. And it worked, but it took a long time. It wasn't until September 7 that the first funds went out to assisted-living when the decision was made that both for folks that take Medicaid waiver and for straight pure private pay AL, they will all receive 2% of their 2019 revenue. Now, that's not enough. And the needs are still much greater. But it opened the door now to us pursuing additional relief. And so as we talk today, the third phase of the HHS funds are under application, what they're calling the Phase 3 portal where they have specifically said that assisted-living can apply. And as they're trying to figure out how to hand out an additional $20 billion, assisted-living providers again can apply or/and are a part of that. So we are hopeful and optimistic that as the weeks and months continue, now that we've, kind of, broken through with assisted-living, we'll be able to have greater success down the road. Now, let me talk a little bit about the future. What's next? And as investors, what should you be looking at and where is all of this headed. First of all, let's talk about the election. Obviously, its right around the corner, and it will have enormous implications on everything including long-term care. I believe, first of all, it will have an impact on the state as well because the last -- what was going to be the last stimulus bill, obviously did not pass before the election and folks threw up their hands this week and said, let's come back after the election. The conventional view in DC, and I agree with it, is that there is 100% chance that there will be another stimulus bill. So the outcome of the election is irrelevant whether or not there will be a bill, there will be a bill either way. Where it is relevant to is the size of the bill. If republicans retain one part of the apparatus, whether it's the presidency or the senate, the stimulus bill is very likely to be of the size that was being discussed when the discussions fell apart this week, somewhere around $1.8 trillion to $2.2 trillion. And of that significant additional funds will be added to the CARES Act funding that will then be available for both skilled nursing and assisted-living. On the other hand, if the democrats win everything, it's possible that there won't be a stimulus bill in the lame duck. They may want to wait until they take over, but whenever there is a stimulus bill, if the democrats take over it will be larger than the $1.8 trillion to $2.2 trillion. It'll be more like the $3 trillion bill that they passed back in August and that may just be the beginning. They are clearly wanting to spend significant amounts of money to stimulate the economy in their view to fight COVID. So it's not really a question of whether there will be a stimulus bill. It's just a question of how large will the bill be and there will be important things in the bill that will help those skilled nursing and assisted-living. So first thing to look forward to is, some pretty good additional relief in the form of stimulus. Second is clearly a whole discussion of vaccines. You're probably following the science on vaccines. The drug companies seem to be making really, really good progress. As much as we failed on the public policy side to contain COVID, the scientists have done a spectacular job on therapeutics and it looks like on the vaccine front. The good news is that we've been able to convince the policymakers that not only should assisted-living and skilled nursing be a priority for the vaccine, they've actually created a turnkey program for us to distribute the vaccine, and you probably read about the agreement with Walgreens and CVS to provide vaccinations for all assisted-living buildings and all skilled nursing buildings across the country. If, in fact, we have a vaccine that's approved by the end of the year, I think there is a possibility that all of our residents and all of our staff will be vaccinated in January and in February and it will create this wonderful time that I'm certainly looking forward to where we would be able to say to people that the safest place in the country for an older person right now is in one of the long-term care facilities that are out there. The third thing that I would talk a little bit about is testing. Testing is continuing to get better and it's getting cheaper and we are being prioritized for it. So when you kind of look at where are we headed over the next few months, I think over the next few months there will be robust testing, a clear understanding in our -- in the long-term care buildings who has COVID and who doesn't and quarantining and safety and containment and all of that. And then, hopefully, we will get into the vaccine phase, we'll get people vaccinated. And as all of this is going, we'll continue to receive the funding that we need from the state and federal level to keep our heads above water. Now, there are two remaining questions that I'm sure are at the forefront of your thoughts as you think about investing in this space. The first is a liability situation. And the answer to whether or not there will be a federal liability solution is highly tied to the election. As long as the republicans maintain one part of the federal apparatus, whether it's the presidency or the senate, I believe that they will continue, I think that the republicans will continue to maintain that any future stimulus bill needs to have the kind of liability protection that all healthcare providers need to function going forward. If there was a democratic sweep next Tuesday, there is the possibility that this liability discussion will be set by -- set aside. Now, there is another school of thought. And the other school of thought is that if the democrats sweep everything, they have an understanding for the economy to move forward, there's got to be some kind of liability protection. So there are some who believe that even if the democrats win everything, that in the lame duck they will want to get out of their way a smaller stimulus bill to be followed up by a bigger one in January or February and as part of this smaller stimulus bill would be some level of liability protection. Long story short, we'll know after the election whether or not liability protection at the federal level is a possibility or not, and if it is what it will look like. And then, secondly, the whole issue of the business case of long term care. The good news on census is that although it initially declined about 10% on the skilled nursing side it hasn't collapsed any further. Now the bad news is this hasn't gotten any better either. The conventional thought among the operators that I talk with every single day is that once we get a vaccine and people feel more comfortable coming into buildings, we'll be able to rebuild the census. If that's true, we will be okay. And that is because the federal funding will be sufficient enough to get us to a vaccine. If once we get to a vaccine, we can start rebuilding census 0.5% or 1% a month, the numbers work out. On the other hand, if we get to a vaccine and census doesn't recover, we got a real problem. And so, I think, everybody's aware that it's all about census, and our belief and our hope that it will gradually improve once we get past the vaccination. And finally, I just remind them, folks that are on the call, of something that you're clearly aware of, but you wouldn't be interested in this space at all and that is that the demographics are finally on our side. We went through this demographic trough in the 2010s where the number of people between 80 and 85 really wasn't increasing in the U.S. Well, we're past that now. We got past that in 2017. And the pandemic hasn't ended that. There will continue to be dramatic growth of the population group that needs our services. At the same time, the pandemic will lead to a discouragement of new investment, there will be less new capacity out there and you combine those two together. And I think this would be the case, medium and long-term can be made for the space. I'm not here to tell you you should absolutely continue to invest in the space, but I am saying that I am continuing to invest in the space. I continue to believe in the space. And as horrific as this looked back in March, we're in a much better spot right now. So with that, I'll end my comments and look forward to any questions that people have.
