Forward-Looking Statements and Factors Affecting Future Results
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this document, including
statements regarding potential future changes in reimbursement. This document
contains "forward-looking statements" within the meaning of the federal
securities laws. These statements relate to our expectations, beliefs,
intentions, plans, objectives, goals, strategies, future events, performance and
underlying assumptions and other statements other than statements of historical
facts. In some cases, you can identify forward-looking statements by the use of
forward-looking terminology including, but not limited to, terms such as "may,"
"will," "anticipates," "expects," "believes," "intends," "should" or comparable
terms or the negative thereof. These statements are based on information
available on the date of this filing and only speak as to the date hereof and no
obligation to update such forward-looking statements should be assumed. Our
actual results may differ materially from those reflected in the forward-looking
statements contained herein as a result of a variety of factors, including,
among other things:
(i) those items discussed under "Risk Factors" in Part I, Item 1A to our annual
report on Form 10-K ;
uncertainties relating to the business operations of the operators of our
(ii) assets, including those relating to reimbursement by third-party payors,
regulatory matters and occupancy levels;
the impact of the 2019 novel coronavirus ("COVID-19") on our business and
the business of our operators, including without limitation, the extent and
duration of the COVID-19 pandemic, increased costs and decreased occupancy
(iii) levels experienced by operators of skilled nursing facilities ("SNFs") and
assisted living facilities ("ALFs") in connection therewith, and the extent
to which continued government support may be available to operators to
offset such costs and the conditions related thereto;
the ability of any of Omega's operators in bankruptcy to reject unexpired
lease obligations, modify the terms of Omega's mortgages and impede the
(iv) ability of Omega to collect unpaid rent or interest during the pendency of a
bankruptcy proceeding and retain security deposits for the debtor's
obligations, and other costs and uncertainties associated with operator
bankruptcies;
our ability to re-lease, otherwise transition, or sell underperforming assets
(v) or assets held for sale on a timely basis and on terms that allow us to
realize the carrying value of these assets;
(vi) the availability and cost of capital to us;
(vii) changes in our credit ratings and the ratings of our debt securities;
(viii) competition in the financing of healthcare facilities;
(ix) competition in long-term healthcare industry and shifts in the perception of
various types of long-term care facilities, including SNFs and ALFs;
(x) additional regulatory and other changes in the healthcare sector;
(xi) changes in the financial position of our operators;
(xii) the effect of economic and market conditions generally and, particularly,
in the healthcare industry;
(xiii) changes in interest rates;
(xiv) the timing, amount and yield of any additional investments;
(xv) changes in tax laws and regulations affecting real estate investment trusts
("REITs");
the potential impact of changes in the SNF and ALF markets or local real
(xvi) estate conditions on our ability to dispose of assets held for sale for the
anticipated proceeds or on a timely basis, or to redeploy the proceeds
therefrom on favorable terms;
(xvii) our ability to maintain our status as a REIT; and
the effect of other factors affecting our business or the businesses of
(xviii) our operators that are beyond our or their control, including natural
disasters, other health crises or pandemics and governmental action;
particularly in the healthcare industry.
46
Table of Contents
Overview
Omega Healthcare Investors, Inc. ("Omega") was formed as a real estate
investment trust ("REIT") and incorporated in the State of Maryland on March 31,
1992. Omega is structured as an umbrella partnership REIT ("UPREIT") under which
all of Omega's assets are owned directly or indirectly by, and all of Omega's
operations are conducted directly or indirectly through, its operating
partnership subsidiary, OHI Healthcare Properties Limited Partnership ("Omega
OP"). Omega OP was formed as a limited partnership and organized in the State of
Delaware on October 24, 2014. Unless stated otherwise or the context otherwise
requires, the terms the "Company," "we," "our" and "us" means Omega and Omega
OP, collectively.
Omega has one reportable segment consisting of investments in healthcare-related
real estate properties located in the United States ("U.S.") and the United
Kingdom ("U.K."). Our core business is to provide financing and capital to the
long-term healthcare industry with a particular focus on skilled nursing
facilities ("SNFs") and assisted living facilities ("ALFs"), and to a lesser
extent, independent living facilities ("ILFs"), rehabilitation and acute care
facilities ("specialty facilities") and medical office buildings ("MOBs"). Our
core portfolio consists of long-term leases and mortgage agreements. All of our
leases are "triple-net" leases, which require the operators (we use the term
"operator" to refer to our tenants and mortgagors and their affiliates who
manage and/or operate our properties) to pay all property-related expenses. Our
mortgage revenue derives from fixed rate mortgage loans, which are secured by
first mortgage liens on the underlying real estate and personal property of the
mortgagor. Our other investment income derives from fixed and variable rate
loans to our operators and/or their principals to fund working capital and
capital expenditures. These loans, which may be either unsecured or secured by
the collateral of the borrower, are classified as other investments.
Omega OP is governed by the Second Amended and Restated Agreement of Limited
Partnership of OHI Healthcare Properties Limited Partnership, dated as of
April 1, 2015 (the "Partnership Agreement"). Omega has exclusive control over
Omega OP's day-to-day management pursuant to the Partnership Agreement. As of
June 30, 2020, Omega owned approximately 97% of the issued and outstanding units
of partnership interest in Omega OP ("Omega OP Units"), and investors owned
approximately 3% of the Omega OP Units.
Omega's consolidated financial statements include the accounts of (i) Omega,
(ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega
and (iv) other entities in which Omega or Omega OP has a majority voting
interest and control. All intercompany transactions and balances have been
eliminated in consolidation, and Omega's net earnings are reduced by the portion
of net earnings attributable to noncontrolling interests. Omega OP's
consolidated financial statements include the accounts of (i) Omega OP, (ii) all
direct and indirect wholly owned subsidiaries of Omega OP and (iii) other
entities in which Omega OP has a majority voting interest and control. All
intercompany transactions and balances have been eliminated in consolidation.
Omega OP's net earnings are reduced by the portion of net earnings attributable
to the noncontrolling interest.
As of June 30, 2020, our portfolio of real estate investments consisted of 981
healthcare facilities, located in 40 states and the U.K. and operated by 69
third-party operators. Our investment in these facilities, net of impairments
and allowances, totaled approximately $9.8 billion at June 30, 2020, with
approximately 97% of our real estate investments related to healthcare
facilities. Our portfolio is made up of 767 SNFs, 114 ALFs, 28 specialty
facilities, two medical office buildings, fixed rate mortgages on 57 SNFs, three
ALFs and four specialty facilities and six facilities that are held for sale. At
June 30, 2020, we also held other investments of approximately $434.7 million,
consisting primarily of secured loans to third-party operators of our facilities
and $195.5 million of investments in five unconsolidated joint ventures.
As of June 30, 2020 and December 31, 2019, we do not have any material
properties or operators with facilities that are not materially occupied.
47
Table of Contents
While the COVID-19 pandemic did not materially impact our rental revenue for the
first two quarters of 2020 and we have collected substantially all of our
contractual rents due during this time and in July 2020, the COVID-19 pandemic
continues to have a significant impact on our operators. As of July 30, 2020,
our operators reported 6,133 total confirmed cases of COVID-19 in our facilities
which includes cases involving employees and residents, including patients known
to be positive at the time of admission from a hospital or healthcare center.
The total cases are within 415 facilities as of July 30, 2020, or 43.3%, of our
959 operating facilities as of June 30, 2020. The total confirmed cases reported
by our operators may not be adjusted downward for recoveries, discharges or
deaths, and may be significantly lower than or different from actual cases based
on the availability of testing and the lag time involved in testing and
reporting, as well as the accuracy of reporting. We have not independently
validated such facility virus incidence information and can provide no assurance
regarding its accuracy or that there have not been any changes since the time
the information was obtained from our operators; we also undertake no duty to
update this information.
Many of our operators have reported incurring significant cost increases as a
result of the pandemic, with dramatic increases for facilities with positive
cases. We believe these increases primarily stem from elevated labor costs,
including increased use of overtime and bonus pay, as well as a significant
increase in both the cost and usage of personal protective equipment ("PPE") and
supplies. In terms of occupancy levels, many of our operators have reported
experiencing declines, in part due to the elimination or suspension of elective
hospital procedures, fewer discharges from hospitals to SNFs and higher hospital
readmittances from SNFs. While government relief measures at the federal and
state levels, including expanded Medicaid reimbursements, have offered
meaningful support to offset a portion of these cost increases and impacts to
our SNF operators, we cannot at this time estimate the net impact going forward
to these operators, and we cannot estimate the extent to which ALF operators
will receive governmental relief.
There are a number of uncertainties we face as we consider the potential impact
of COVID-19 on our business, including how long census disruption and elevated
COVID-19 costs will last and the extent to which funding support from the
federal government and the states will continue to offset these incremental
costs. We also do not know the number of Omega facilities that will ultimately
experience widespread, high-cost outbreaks of COVID-19, and while we have
requested reporting from operators of their numbers of cases, and the federal
government has required additional reporting by operators, we may not receive
accurate information on the number of cases, it may be inconsistent across
operators, and we may experience a lag in reporting. We expect that heightened
clinical protocols for infection control within facilities, additional testing
of employees and residents and the monitoring of employees, guests and others
entering facilities will continue for some period; however, we do not know if
future reimbursement rates will be sufficient to cover the increased costs of
enhanced infection control and monitoring. In addition, we do not know how and
when the implementation of new treatments or vaccines will impact our operators
and their populations.
As such, while we continue to believe that longer term demographics will drive
increasing demand for needs-based skilled nursing care, we expect the
uncertainties to our business described above to persist at least for the near
term until we can gain more visibility into the costs our operators will
experience and for how long, and the level of additional governmental support
that will be available to them, as well as the potential support our operators
may request from us.
Given this uncertainty, we have taken several steps to enhance our capital
position as a precautionary measure, including a partial draw on our $1.25
billion revolving credit facility in the amount of $300 million during the first
quarter of 2020 which was subsequently repaid in the second quarter of 2020, as
well as entering into $400 million (notional amount) of 10-year interest rate
swaps at an average swap rate of 0.8675% that expire in 2024, which provides us
with some cost certainty for the refinancing of our senior notes maturing in
2023. We believe the availability under our credit facility and hedging strategy
support our liquidity and provide flexibility to manage the potential impact to
our business. Accordingly, we have maintained our dividend level of $0.67 per
share for the first and second quarters of 2020. We will continue to evaluate
any additional steps that may be needed to maintain adequate liquidity.
48
Table of Contents
Taxation
Omega is a REIT for United States federal income tax purposes, and Omega OP is a
pass through entity for United States federal income tax purposes.
Since our inception, Omega has elected to be taxed as a REIT under the
applicable provisions of the Internal Revenue Code ("Code"). A REIT is generally
not subject to federal income tax on that portion of its REIT taxable income
which is distributed to its stockholders, provided that at least 90% of such
taxable income is distributed each tax year and certain other requirements are
met, including asset and income tests. So long as we qualify as a REIT under the
Code, we generally will not be subject to federal income taxes on the REIT
taxable income that we distribute to stockholders, subject to certain
exceptions.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income taxes on its taxable income at regular corporate rates and
dividends paid to our stockholders will not be deductible by us in computing
taxable income. Further, we would not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year in which
qualification is denied, unless the Internal Revenue Service grants us relief
under certain statutory provisions. Failing to qualify as a REIT could
materially and adversely affect our net income; however, we believe we are
organized and operate in such a manner as to qualify for treatment as a REIT. We
test our compliance within the REIT taxation rules to ensure that we are in
compliance with the REIT rules on a quarterly and annual basis. We review our
distributions and projected distributions each year to ensure we have met and
will continue to meet the annual REIT distribution requirements. In 2020, we
expect to pay dividends in excess of our taxable income.
Subject to the limitation under the REIT asset test rules, we are permitted to
own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRSs").
We have elected for certain of our active subsidiaries to be treated as TRSs.
Our domestic TRSs are subject to federal, state and local income taxes at the
applicable corporate rates. Our foreign TSRs are subject to foreign income
taxes. As of June 30, 2020, one of our TRSs that is subject to federal, state
and local income taxes at the applicable corporate rates had a net operating
loss carry-forward of approximately $5.7 million. Up to 100% of the net
operating loss carry-forwards arising in taxable years ending prior to January
1, 2018, may be used to reduce taxable income for any taxable year during the
eligible carry-forward period. Changes made by the Tax Cuts and Jobs Act of
2017 (the "2017 Act") limited the amount of net operating loss ("NOL")
carry-forward arising in tax years ending subsequent to December 31, 2018, to
reduce 80% of taxable income for any taxable year during the eligible
carry-forward period. Our NOL carry-forward was fully reserved as of June 30,
2020, with a valuation allowance due to uncertainties regarding realization.
Under current law, our NOL carryforwards generated up through December 31, 2017
may be carried forward for no more than 20 years, and our net operating loss
carryforward generated in our taxable years ended December 31, 2019 and December
31, 2018 may be carried forward indefinitely. However, the Coronavirus Aid,
Relief and Economic Security Act (the "CARES Act") modified the NOL carryback
rules and deferred the application for the NOL carry-forward rules.
The CARES Act signed into law on March 27, 2020 modified the NOL carryforward
rules applicable to certain of the NOL carryforwards possessed by our TRSs.
First, the CARES Act defers the application of 80% of taxable income limitation,
which was added to the Code by the 2017 Act, to our TRSs until their taxable
years ended December 31, 2021, in addition to modifying the computation of the
80% limitation. Additionally, the CARES Act permits the carryback of NOLs
generated by our TRSs in 2018, 2019, and 2020 for up to five years to offset
taxable income reported in any of those prior tax years and recover income taxes
paid in such prior tax years. Other provisions of the CARES Act may also impact
the computation of taxable income by any of our TRSs or Omega and Omega OP. The
modifications to the NOL carryback rules do not permit the carryback of a NOL by
a REIT and, thus, will not impact Omega. We do not anticipate that such changes
will impact materially the computation of Omega's taxable income, or the taxable
income of any Omega entity, including our TRSs. We also do not expect that Omega
or any Omega entity, including our TRSs, will realize a material tax benefit as
a result of the changes to the provisions of the Code made by the CARES Act.
49
Table of Contents
For the three months ended June 30, 2020 and 2019, we recorded approximately
$0.2 million and $0.3 million, respectively, of state and local income tax
provisions. For the six months ended June 30, 2020 and 2019, we recorded
approximately $0.6 million and $0.4 million, respectively, of state and local
income tax provisions. For the three months ended June 30, 2020 and 2019, we
recorded approximately $0.7 million and $0.5 million, respectively, of tax
provisions for foreign income taxes. For the six months ended June 30, 2020 and
2019, we recorded approximately $1.3 million and $1.1 million, respectively, of
tax provisions for foreign income taxes. The expenses were included in income
tax expense on our Consolidated Statements of Operations.
Government Regulation and Reimbursement
The healthcare industry is heavily regulated. Our operators are subject to
extensive and complex federal, state and local healthcare laws and regulations.
These laws and regulations are subject to frequent and substantial changes
resulting from the adoption of new legislation, rules and regulations, and
administrative and judicial interpretations of existing law. The ultimate timing
or effect of these changes, which may be applied retroactively, cannot be
predicted. Changes in laws and regulations impacting our operators, in addition
to regulatory non-compliance by our operators, can have a significant effect on
the operations and financial condition of our operators, which in turn may
adversely impact us. There is the potential that we may be subject directly to
healthcare laws and regulations because of the broad nature of some of these
regulations, such as the Anti-kickback Statute and False Claims Act, among
others.
Additionally, emergency legislation, including the CARES Act enacted on March
27, 2020 and discussed below, and temporary changes to regulations and
reimbursement issued by the current administration in response to the COVID-19
pandemic continue to have a significant impact on the operations and financial
condition of our operators. The extent of the COVID-19 pandemic's effect on our
and our operators' operational and financial performance will depend on future
developments, including the duration, spread and intensity of the outbreak, as
well as the difference in how the pandemic may impact SNFs in contrast to ALFs,
all of which developments and impacts are uncertain and difficult to predict.
Due to the speed with which the situation is changing, we are not able at this
time to estimate the effect of these factors on our business, but the adverse
impact on our business, results of operations, financial condition and cash
flows could be material.
The following is a discussion of certain laws and regulations generally
applicable to our operators, and in certain cases, to us.
Healthcare Reform. A substantial amount of rules and regulations have been
issued under the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010 (collectively referred to
as the "Healthcare Reform Law"). The current administration has brought several
Congressional efforts to repeal and replace the Affordable Care Act. We expect
additional rules, regulations and judicial interpretations in response to legal
and other constitutional challenges to be issued that may materially affect our
operators' financial condition and operations. Even if the Healthcare Reform
Law is not ultimately amended or repealed, the current administration or
Congress could propose changes impacting implementation of the Healthcare Reform
Law. The ultimate composition and timing of any legislation enacted under the
current administration that would impact the current implementation of the
Healthcare Reform Law remains uncertain. Given the complexity of the Healthcare
Reform Law and the substantial requirements for regulation thereunder, the
impact of the Healthcare Reform Law on our operators or their ability to meet
their obligations to us cannot be predicted, whether in its current form or as
amended, repealed or interpreted.
Reform Requirements for Long-Term Care Facilities. As part of the Healthcare
Reform Law, the Centers for Medicare and Medicaid Services ("CMS") issued a
final rule on October 4, 2016 modifying the conditions of participation in
Medicare and Medicaid for SNFs. The extensive changes included provisions
related to staff training, discharge planning, infection prevention and control
programs, and pharmacy services, among others. While many of the regulations
have become effective, the implementation and enforcement of some provisions,
particularly with respect to the Quality Assurance Program Improvement ("QAPI")
and compliance and ethics related requirements of the Phase 3 regulations did
not become effective until November 28, 2019.
50
Table of Contents
Reimbursement Generally. A significant portion of our operators' revenue is
derived from government-funded reimbursement programs, consisting primarily of
Medicare and Medicaid. As federal and state governments continue to focus on
healthcare reform initiatives, efforts to reduce costs by government payors will
likely continue, which may result in reductions in reimbursement at both the
federal and state levels. Additionally, new and evolving payor and provider
programs, including but not limited to Medicare Advantage, dual eligible,
value-based purchasing and bundled payments, could adversely impact our tenants'
and operators' liquidity, financial condition or results of operations.
Significant limits on the scope of services reimbursed and/or reductions of
reimbursement rates could have a material adverse effect on our operators'
results of operations and financial condition, which could adversely affect our
operators' ability to meet their obligations to us.
Changes Related to COVID-19. SNFs have continued to be impacted by the
Bipartisan Budget Act of 2018, which extended Medicare sequestration and
Medicare reimbursement cuts to providers and plans by 2% across the board
through 2027. However, the CARES Act temporarily suspends Medicare
sequestration for the period of May 1 through December 31, 2020, resulting in an
increase in fee-for-service Medicare payments by approximately 2% as compared to
what providers would have otherwise received during this period. In exchange for
this temporary suspension, the CARES Act also extends the mandatory
sequestration policy by an additional one year, i.e., through 2030. On March 18,
2020, the Families First Coronavirus Response Act was enacted, which provides a
temporary 6.2% increase to each qualifying state and territory's Medicaid
Federal Medical Assistance Percentage ("FMAP") effective January 1, 2020. The
temporary FMAP increase will extend through the last day of the calendar quarter
in which the COVID-19 public health emergency declared by the U.S. Department of
Health and Human Services ("HHS"), including any extensions, terminates. As part
of the requirements for receiving the temporary FMAP increase, states must cover
testing services and treatments for COVID-19 and may not impose deductibles,
copayments, coinsurance or other cost sharing charges for any quarter in which
the temporary increased FMAP is claimed. HHS announced on July 23, 2020 that the
public health emergency, which was currently set to expire on July 31, 2020,
would be extended until October 31, 2020. In addition to maintaining the
increased FMAP, this extension also allows the temporary Section 1135 waivers,
including suspension of the three-day prior hospital stay coverage requirement
and the relaxation of telehealth restrictions, to continue.
Additionally, the CARES Act allocates $100 billion to a Public Health and Social
Services Emergency Fund to "reimburse, through grants or other mechanisms,
eligible health care providers for health care related expenses or lost revenues
that are attributable to coronavirus." Nursing facility operators participating
in Medicare and Medicaid may be eligible to receive compensation for costs
incurred in the course of providing medical services, such as those related to
obtaining PPE, COVID-19 related testing supplies, and increased staffing or
training, provided that such costs are not compensated by another source. While
"lost revenue" is not defined in the CARES Act, it is anticipated that it could
include lost revenue due to a decrease in resident census or a change in the
margin of services provided to residents. The Secretary of the HHS has broad
authority and discretion to determine payment eligibility and the amount of such
payments. Further, Congress appropriated $75 billion for healthcare providers
through the Paycheck Protection Program and Health Care Enhancement Act. HHS is
distributing this money through the Provider Relief Fund, and these payments do
not need to be repaid. As of June 2020, HHS had announced distributions of
congressional relief funds to healthcare providers, including approximately $50
billion to participants in the Medicare program equivalent to 2% of their annual
revenue, as well as $15 billion in funding to providers that participate in
Medicaid and the Children's Health Insurance Program (up to 2% of their annual
revenues) but that had not received funding in the initial rounds. The ultimate
allocation of these distributions to healthcare providers may differ from the
methodology initially announced by HHS, in which distributions would be based on
prior Medicare reimbursements or historical net patient revenue. In addition,
distributions may be conditioned on and subject to operators meeting certain
compliance obligations.
51
Table of Contents
In July 2020, CMS announced that it will devote $5 billion of the Provider
Relief Fund authorized by the CARES Act to qualified Medicare-certified long
term care facilities to address critical needs in nursing homes, such as the
hiring of additional staff, implementing infection control "mentorship" programs
with subject matter experts, increased testing, and providing additional
technology services to residents who are unable to receive visitors. This new
funding is in addition to the $4.9 billion previously announced to offset
revenue losses and assist nursing homes with additional costs related to
responding to the COVID-19 public health emergency and the shipments of PPE
provided to nursing homes by the Federal Emergency Management Agency. CMS
additionally announced that it will begin requiring, rather than recommending,
that all nursing homes in states with a 5% positivity rate or greater test all
nursing home staff each week, although no final rule has been promulgated and
the requirement may ultimately be modified.
While we believe that to date, the payouts under the Provider Relief Fund and
Public Health and Social Services Emergency Fund have primarily benefited
Medicare providers, with more limited funding for Medicaid providers and for
senior housing operators, we cannot predict the extent to which any of our
operators will receive such funds, what the financial impact of receiving such
funds would be on their operations, and whether operators will be able to meet
the compliance requirements associated with the funds.
The CARES Act additionally provided payroll tax relief for employers allowing
them to defer payment of employer Social Security taxes that are otherwise owed
for wage payments made after March 27, 2020 through the end of the calendar
year. Instead of depositing these taxes on a next-day or semi-weekly basis, the
deposit due date for 50% of the taxes is deferred to December 31, 2021, with the
remaining 50% deferred until December 31, 2022.
In an effort to increase cash flow to providers impacted by COVID-19, CMS had
temporarily expanded the Accelerated and Advance Payment Programs on March 28,
2020. CMS is authorized to provide accelerated or advance payments during the
period of the public health emergency to any Medicare provider or supplier who
submits a request to the appropriate Medicare Administrative Contractor ("MAC")
and meets the required qualifications. Traditionally repayment of these
advance/accelerated payments is set to begin at 90 days, however CMS has
extended the repayment of these accelerated/advance payments to begin 120 days
after the date of issuance of the payment. However, CMS announced on April 26,
2020 that it would not be accepting any new applications for the Advance Payment
Program and would be reevaluating all pending and new applications for
Accelerated Payments in consideration of the direct payments made available to
providers through the HHS Provider Relief Fund.
We cannot predict the impact of these programs on the business or financial
condition of any of our operators. In addition to COVID-19 reimbursement
changes, the current administration announced several quality of care related
initiatives on April 30, 2020 related to addressing the COVID-19 pandemic in
long-term care facilities. One of the initiatives is the formation of the
Coronavirus Commission for Safety and Quality in Nursing Homes, a special task
force created for the purpose of addressing the rising death toll of residents
in nursing homes. The task force is composed of leading industry experts,
doctors and scientists, resident and patient advocates, family members,
infection and prevention control specialists, and state and local authorities.
A second announcement was made which advised that the Federal Emergency
Management Agency would begin shipping two weeks' worth of PPE to each of the
nation's 15,400 nursing homes, with all nursing homes receiving a total of 14
days' worth of PPE no later than July 4, 2020. The current administration
additionally released an interim final regulation regarding the requirement for
nursing home operators to report COVID-19-related data directly to the Centers
for Disease Control and Prevention in addition to CMS. Nursing home providers
will be required to report infections and death data at least weekly to federal
authorities, and by 5 p.m. the next day to residents and family members. An
additional announcement was made that CMS will provide states with $81 million
from the CARES Act to increase their inspections of nursing homes. To ensure
effective oversight is achieved, CMS will allocate the CARES Act funding based
on performance-based metrics. On July 10, 2020, CMS announced plans to deploy
Quality Improvement Organizations across the U.S. to provide immediate
assistance to nursing homes in the COVID-19 hotspot areas as identified by the
White House Coronavirus Task Force. CMS subsequently announced on July 14, 2020
a large-scale procurement of rapid point-of-care diagnostic testing supplies to
be distributed to nursing homes in the COVID-19 hotspots areas. However, due to
the lower sensitivity and specificity of these test devices, not all state
public health departments allow for their use, and many have requirements in
place for using these tests appropriately. This initiative is a one-time
procurement of devices and tests targeted toward facilitating on-site testing
among nursing home residents and staff. Following initial distribution of
testing supplies from CMS, nursing homes will be able to procure additional
tests directly from the respective manufacturers.
52
Table of Contents
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the
Coronavirus Crisis announced the launch of an investigation into the COVID-19
response of nursing homes. The Select Subcommittee is seeking information from
CMS on the enforcement of health and safety regulations during the crisis, data
collection, and provision of life-saving supplies. Additionally, the Select
Subcommittee is seeking documents and information from the five largest U.S.
for-profit nursing home operators related to COVID-19 cases and deaths, testing,
PPE, staffing levels and pay, legal violations, and efforts to prevent further
infections, as well as additional transparency regarding the use of federal
funds by nursing homes during the pandemic.
Medicaid. State budgetary concerns, coupled with the implementation of rules
under the Healthcare Reform Law, or prospective changes to the Healthcare Reform
Law under the current administration or Congress, may result in additional
significant changes in healthcare spending at the state level. Additionally,
the need to control Medicaid expenditures may be exacerbated by the potential
for increased enrollment in Medicaid due to unemployment and declines in family
incomes resulting from the COVID-19 pandemic. Since our operators' profit
margins on Medicaid patients are generally relatively low, more than modest
reductions in Medicaid reimbursement or an increase in the percentage of
Medicaid patients has in the past and may in the future adversely affect our
operators' results of operations and financial condition, which in turn could
can adversely impact us.
In the state of Florida, the average Medicaid reimbursement rate for SNFs
decreased 4.5% effective July 1, 2019, resulting from the loss of one-time
discretionary funding applied to October 1, 2018 Florida Medicaid reimbursement
rates to cover the impact of hold-harmless provisions in the new, price-based
Prospective Payment System ("PPS") enacted by Florida at that time. However,
the net impact of this rate decrease was to revert the average rate
approximately to the pre-PPS, cost-based level as of September 30, 2018, which
we believe operators can generally address with operational adjustments to
maintain coverage levels. A smaller discretionary increase effective October 1,
2019 increased the average rate by 0.7%. When the transition hold-harmless
provisions expire on September 30, 2021, the PPS rates will no longer be
dependent on discretionary funding levels. On June 29, 2020, Florida Governor
Ron DeSantis signed a $92.2 billion state budget for FY 2020-2021 into law,
which includes a total Medicaid rate increase of $105 million for nursing
centers. At June 30, 2020, 14% of our investments were in Florida.
Texas, which represents 9% of our investments as of June 30, 2020, presents a
difficult operating environment for SNF operators as a result of lower statewide
occupancy levels, as compared to other states, and a Medicaid rate reimbursement
that we believe is among the lowest in the United States. Several of our
operators have experienced lower operating margins on their SNFs in Texas, as
compared to other states, as a result of the foregoing and labor costs.
Additionally, in mid-November 2019, CMS proposed the Medicaid Fiscal
Accountability Rule ("MFAR"), which would modify and refine the current federal
portion of Medicaid funding for two programs commonly referred to as the upper
payment limit ("UPL") and provider taxes. As proposed, MFAR would further
regulate and in some cases materially reform, eliminate or prompt the
replacement of certain state Medicaid supplemental payment systems and other
allowable financing arrangements that currently benefit healthcare providers. We
have operators in two states, Indiana and Texas, that participate in UPL
programs and operators in 36 states who received provider tax reimbursements as
of June 30, 2020. Based on our analysis of MFAR and discussions with our
operators and other industry leaders, we believe MFAR as proposed would
eliminate the incremental UPL funds and that most, if not all, states are or
will be able to become compliant under the revised provider tax program. The
proposed MFAR is currently in a comment period and may be changed before a final
rule is adopted, or may not be adopted at all. We believe the ultimate
potential impact of MFAR on our facilities in Indiana and Texas is uncertain at
this time, in part as we expect any reductions in revenues may be at least
partially offset by expense reductions. If ultimately implemented, MFAR could
reduce reimbursement to our operators in those states affected by the rule,
which could ultimately have a material adverse effect on the financial condition
of those operators.
53
Table of Contents
Medicare. On July 31, 2020, CMS issued a final rule regarding the government
fiscal year ("FY") 2021 Medicare payment rates and quality payment programs for
SNFs, with aggregate payments projected to increase by $750 million, or 2.2%,
for FY 2021 compared to FY 2020. This estimated reimbursement increase is
attributable to a 2.2% market basket increase factor with a 0.0% reduction for
the multifactor productivity adjustment mandated by the Improving Medicare
Post-Acute Care Transformation Act of 2014 ("IMPACT Act"). The annual update is
reduced by two percentage points for SNFs that fail to submit required quality
data to CMS under the SNF Quality Reporting Program ("QRP"). The final rule
also adopted revised geographic delineations provided by the Office of
Management and Budget to identify a provider's status as an urban or rural
facility and to calculate the wage index. The CMS applied a five percent cap on
any decreases in a provider's wage index from FY 2020 to FY 2021.
Payments to providers are being increasingly tied to quality and efficiency.
The Patient Driven Payment Model ("PDPM"), which was designed by CMS to improve
the incentives to treat the needs of the whole patient, rather than the volume
of services the patient receives, became effective October 1, 2019 (FY 2020).
The PDPM replaces the previous SNF prospective payment system that utilized the
Resource Utilization Group IV case-mix methodology to classify SNF patients
based on the volume of services received with a methodology that instead
utilizes the International Statistical Classification of Diseases and Related
Health Problems ("ICD-10") to classify SNF patients into certain payment groups
based on their clinical disease state. In response to industry stakeholder
comments, the CMS finalized changes to the ICD-10 code mappings as part of the
FY 2021 SNF prospective payment system final rule, effective October 1, 2020.
Beginning October 1, 2019, group therapy is defined as a qualified
rehabilitation therapist or therapy assistant treating two to six patients at
the same time who are performing the same or similar activities. Also effective
October 1, 2019, CMS established a 25% cap for concurrent and group therapy.
Additional changes to reimbursement for group therapy were included in the
Bipartisan Budget Act of 2018, which permanently repealed the therapy caps that
applied to Medicare Part B therapy services provided as of January 1, 2018 and
reduced the reimbursement rate for Medicare Part B therapy services performed by
therapy assistants to 85% of the physician fee schedule beginning January 1,
2022. The former cap amounts were retained as a threshold above which claims
must include confirmation that services are medically necessary as justified by
appropriate documentation in the medical record.
Prior to COVID-19, we believed that certain of our operators could realize
efficiencies and cost savings from increased concurrent and group therapy under
PDPM and some had reported early positive results. Given the ongoing impacts of
COVID-19, many operators are and may continue to be restricted from pursuing
concurrent and group therapy and unable to realize these benefits. Additionally,
our operators continue to adapt to the reimbursement changes and other payment
reforms resulting from the value-based purchasing programs applicable to SNFs
under the 2014 Protecting Access to Medicare Act, which became effective on
October 1, 2018. These reimbursement changes have had and may in the future
have an adverse effect on the operations and financial condition of some
operators and could adversely impact the ability of operators to meet their
obligations to us.
Quality of Care Initiatives. In addition to quality or value based
reimbursement reforms, CMS has implemented a number of initiatives focused on
the reporting of certain facility specific quality of care indicators that could
affect our operators. Since December 2008, CMS has publicly released quality
ratings for all of the nursing homes that participate in Medicare or Medicaid
under its "Five Star Quality Rating System." Facility rankings, ranging from
five stars ("much above average") to one star ("much below average") are updated
on a monthly basis. SNFs are required to provide information for the CMS Nursing
Home Compare website regarding staffing and quality measures.
Recent updates to the Nursing Home Care website and the Five Star Quality Rating
System include revisions to the inspection process and the implementation of new
quality measures. However, as a result of the COVID-19 pandemic, CMS made
changes to, or temporarily suspended the collection and reporting of, certain
survey inspection, staffing levels and quality measures, which impacted the
information posted on the Nursing Home Compare website and used in the Five Star
Quality Rating System calculation. It is possible that these rating changes or
any other ranking system could lead to future reimbursement policies that reward
or penalize facilities on the basis of the reported quality of care parameters.
54
Table of Contents
Office of the Inspector General Activities. The Office of Inspector General
("OIG") has provided long-standing guidance for SNFs regarding compliance with
federal fraud and abuse laws. More recently, the OIG has conducted increased
oversight activities and issued additional guidance regarding its findings
related to identified problems with the quality of care and the reporting and
investigation of potential abuse or neglect at group homes, nursing homes, and
skilled nursing facilities. The OIG has additionally reviewed the staffing
levels reported by SNFs as part of its August 2018 and February 2019 Work Plan
updates, and included a review of involuntary transfers and discharges from
nursing homes in the June 2019 Work Plan updates. Regional Recovery Audit
Contractor program auditors along with the OIG and Department of Justice are
expected to continue their efforts to evaluate SNF Medicare claims for any
excessive therapy charges.
Department of Justice. SNFs are under intense scrutiny for ensuring the quality
of care being rendered to residents and appropriate billing practices conducted
by the facility. The Department of Justice ("DOJ") launched ten regional Elder
Justice Task Forces in 2016 which are coordinating and enhancing efforts to
pursue SNFs that provide grossly substandard care to their residents. These Task
Forces are composed of representatives from the U.S. Attorneys' Offices, State
Medicaid Fraud Control Units, state and local prosecutors' offices, HHS, State
Adult Protective Services agencies, Long Term Care Ombudsmen programs, and law
enforcement. The DOJ has indicated that it is seeking to enhance the work of
the Elder Justice Initiative to identify potential criminal charges when they
uncover false claims for government reimbursements of care. The DOJ's civil
division has historically used the False Claims Act to pursue nursing homes that
bill the federal government for services not rendered or care that is grossly
substandard. In March 2020, the DOJ launched a National Nursing Home
Initiative to coordinate and enhance civil and criminal enforcement actions
against nursing homes with grossly substandard deficiencies such as poor
hygiene, lax infection controls, and inadequate nurse staffing levels. On June
1, 2020, the CMS announced the imposition of civil monetary penalties for
nursing homes with persistent infection control violations and increased
enforcement actions for nursing homes with lower level infection control
deficiencies.
Medicare and Medicaid Program Audits. Governmental agencies and their agents,
such as the Medicare Administrative Contractors, fiscal intermediaries and
carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of
our operators' billing practices from time to time. CMS contracts with Recovery
Audit Contractors on a contingency basis to conduct post-payment reviews to
detect and correct improper payments in the fee-for-service Medicare program, to
managed Medicare plans and in the Medicaid program. CMS also employs Medicaid
Integrity Contractors to perform post-payment audits of Medicaid claims and
identify overpayments. In addition, the state Medicaid agencies and other
contractors have increased their review activities. To the extent any of our
operators are found out of compliance with any of these laws, regulations or
programs, their financial position and results of operations can be adversely
impacted, which in turn could adversely impact us.
Fraud and Abuse. There are various federal and state civil and criminal laws and
regulations governing a wide array of healthcare provider referrals,
relationships and arrangements, including laws and regulations prohibiting fraud
by healthcare providers. Many of these complex laws raise issues that have not
been clearly interpreted by the relevant governmental authorities and courts.
These laws include: (i) federal and state false claims acts, which, among other
things, prohibit providers from filing false claims or making false statements
to receive payment from Medicare, Medicaid or other federal or state healthcare
programs; (ii) federal and state anti-kickback and fee-splitting statutes,
including the Medicare and Medicaid Anti-kickback statute, which prohibit the
payment or receipt of remuneration to induce referrals or recommendations of
healthcare items or services, such as services provided in a SNF; (iii) federal
and state physician self-referral laws (commonly referred to as the Stark Law),
which generally prohibit referrals by physicians to entities for designated
health services (some of which are provided in SNFs) with which the physician or
an immediate family member has a financial relationship; (iv) the federal Civil
Monetary Penalties Law, which prohibits, among other things, the knowing
presentation of a false or fraudulent claim for certain healthcare services and
(v) federal and state privacy laws, including the privacy and security rules
contained in the Health Insurance Portability and Accountability Act of 1996,
which provide for the privacy and security of personal health information.
55
Table of Contents
Violations of healthcare fraud and abuse laws carry civil, criminal and
administrative sanctions, including punitive sanctions, monetary penalties,
imprisonment, denial of Medicare and Medicaid reimbursement and potential
exclusion from Medicare, Medicaid or other federal or state healthcare programs.
Additionally, there are criminal provisions that prohibit filing false claims or
making false statements to receive payment or certification under Medicare and
Medicaid, as well as failing to refund overpayments or improper payments.
Violation of the Anti-kickback statute or Stark Law may form the basis for a
federal False Claims Act violation. These laws are enforced by a variety of
federal, state and local agencies and can also be enforced by private litigants
through, among other things, federal and state false claims acts, which allow
private litigants to bring qui tam or whistleblower actions, which have become
more frequent in recent years.
Several of our operators have responded to subpoenas and other requests for
information regarding their operations in connection with inquiries by the
Department of Justice or other regulatory agencies. In addition, MedEquities
Realty Trust, Inc., which we acquired in May 2019, has responded to a Civil
Investigative Demand from the Department of Justice in connection with Lakeway
Regional Medical Center. See Note 16 - Commitments and Contingencies.
Privacy. Our operators are subject to various federal, state and local laws and
regulations designed to protect the confidentiality and security of patient
health information, including the federal Health Insurance Portability and
Accountability Act of 1996, as amended, the Health Information Technology for
Economic and Clinical Health Act ("HITECH"), and the corresponding regulations
promulgated thereunder (collectively referred to herein as "HIPAA"). The HITECH
Act expanded the scope of these provisions by mandating individual notification
in instances of breaches of protected health information, providing enhanced
penalties for HIPAA violations, and granting enforcement authority to states'
Attorneys General in addition to the HHS Office for Civil Rights ("OCR").
Additionally, in a final rule issued in January 2013, HHS modified the standard
for determining whether a breach has occurred by creating a presumption that any
non-permitted acquisition, access, use or disclosure of protected health
information is a breach unless the covered entity or business associate can
demonstrate through a risk assessment that there is a low probability that the
information has been compromised.
Various states have similar laws and regulations that govern the maintenance and
safeguarding of patient records, charts and other information generated in
connection with the provision of professional medical services. These laws and
regulations require our operators to expend the requisite resources to secure
protected health information, including the funding of costs associated with
technology upgrades. Operators found in violation of HIPAA or any other privacy
law or regulation may face significant monetary penalties. In addition,
compliance with an operator's notification requirements in the event of a breach
of unsecured protected health information could cause reputational harm to an
operator's business.
Licensing and Certification. Our operators and facilities are subject to various
federal, state and local licensing and certification laws and regulations,
including laws and regulations under Medicare and Medicaid requiring operators
of SNFs and ALFs to comply with extensive standards governing operations.
Governmental agencies administering these laws and regulations regularly inspect
our operators' facilities and investigate complaints. Our operators and their
managers receive notices of observed violations and deficiencies from time to
time, and sanctions have been imposed from time to time on facilities operated
by them. In addition, many states require certain healthcare providers to obtain
a certificate of need, which requires prior approval for the construction,
expansion or closure of certain healthcare facilities, which has the potential
to impact some of our operators' abilities to expand or change their businesses.
Americans with Disabilities Act (the "ADA"). Our properties must comply with
the ADA and any similar state or local laws to the extent that such properties
are public accommodations as defined in those statutes. The ADA may require
removal of barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. Should
barriers to access by persons with disabilities be discovered at any of our
properties, we may be directly or indirectly responsible for additional costs
that may be required to make facilities ADA-compliant. Noncompliance with the
ADA could result in the imposition of fines or an award of damages to private
litigants. Our commitment to make readily achievable accommodations pursuant to
the ADA is ongoing, and we continue to assess our properties and make
modifications as appropriate in this respect.
56
Table of Contents
Other Laws and Regulations. Additional federal, state and local laws and
regulations affect how our operators conduct their operations, including laws
and regulations protecting consumers against deceptive practices and otherwise
generally affecting our operators' management of their property and equipment
and the conduct of their operations (including laws and regulations involving
fire, health and safety; staffing; quality of services, including care and food
service; residents' rights, including abuse and neglect laws; and the health
standards set by the federal Occupational Safety and Health Administration). It
is anticipated that our operators will continue to face additional federal and
state regulatory requirements related to the operation of their facilities in
response to the COVID-19 pandemic.
General and Professional Liability. Although arbitration agreements have been
effective in limiting general and professional liabilities for SNF and long term
care providers, there have been numerous lawsuits in recent years challenging
the validity of arbitration agreements in long term care settings. On July 16,
2019, CMS issued a final rule lifting the prohibition on pre-dispute arbitration
agreements offered to residents at the time of admission provided that certain
requirements are met. The rule prohibits providers from requiring residents to
sign binding arbitration agreements as a condition for receiving care and
requires that the agreements specifically grant residents the explicit right to
rescind the agreement within thirty calendar days of signing. In addition,
certain states have enacted protections from certain types of liability in
connection with the provision of COVID-19 related services provided by SNFs and
other healthcare providers.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP") in the United States, and a summary of our
significant accounting policies is included in Note 2 - Summary of Significant
Accounting Policies to our Annual Report on Form 10-K for the year ended
December 31, 2019. Our preparation of the financial statements requires us to
make estimates and assumptions about future events that affect the amounts
reported in our financial statements and accompanying footnotes. Future events
and their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the consolidated financial statements. We have described our most
critical accounting policies in our 2019 Annual Report on Form 10-K for
the year ended December 31, 2019, in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
There have been no changes to our critical accounting policies or estimates
since December 31, 2019, except for the changes that resulted from the adoption
of the new credit loss accounting standard on January 1, 2020, as discussed in
detail in Note 1 - Basis of Presentation and Significant Accounting Policies,
section "Accounting Pronouncements Adopted in 2020" of these unaudited
consolidated financial statements under Part 1, Item 1 of this report and the
accompanying discussion of the credit loss accounting guidance below. See also
Note 2 - Summary of Significant Accounting Policies to our Annual Report on
Form 10-K for the year ended December 31, 2019.
Accounting Pronouncements Adopted in 2020
In June 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit
Losses (Topic 326) ("ASU 2016-13"), which changes the impairment model for most
financial assets. The new model uses a forward-looking expected loss method,
which will generally result in earlier recognition of allowances for credit
losses. The measurement of expected credit losses is based upon historical
experience, current conditions, and reasonable and supportable forecasts that
affect the collectability of the reported amount. ASU 2016-13 specifically
excludes from its scope receivables arising from operating leases accounted for
under Topic 842. We adopted ASU 2016-13 on January 1, 2020 using the modified
retrospective approach and we recorded an initial $28.8 million allowance for
expected credit losses with a corresponding adjustment to equity.
57
Table of Contents
© Edgar Online, source Glimpses
OMEGA HEALTHCARE INVESTORS, INC. 
