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 ability of any of Omega's operators in bankruptcy to reject unexpired
lease obligations, modify the terms of Omega's mortgages and impede the
(iii) 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
(iv) assets or assets held for sale on a timely basis and on terms that allow us
to realize the carrying value of these assets;
(v) the availability and cost of capital to us;
(vi) changes in our credit ratings and the ratings of our debt securities;
(vii) competition in the financing of healthcare facilities;
the impact of COVID-19 on our business and the business of our operators,
including without limitation, the extent and duration of the COVID-19
(viii) pandemic, increased costs experienced by operators of skilled nursing
facilities ("SNFs") and assisted living facilities ("ALFs") in connection
therewith, and the extent to which government support may be available to
operators to offset such costs and the conditions related thereto;
(ix) additional regulatory and other changes in the healthcare sector;
(x) changes in the financial position of our operators;
(xi) the effect of economic and market conditions generally and, particularly, in
the healthcare industry;
(xii) changes in interest rates;
(xiii) the timing, amount and yield of any additional investments;
(xiv) 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
(xv) 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;
(xvi) our ability to maintain our status as a REIT; and
the effect of other factors affecting our business or the businesses of
(xvii) 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.
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.
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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
March 31, 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 March 31, 2020, our portfolio of real estate investments consisted of 985
healthcare facilities, located in 40 states and the U.K. and operated by 70
third-party operators. Our investment in these facilities, net of impairments
and allowances, totaled approximately $9.7 billion at March 31, 2020, with
approximately 97% of our real estate investments related to long-term care
facilities. Our portfolio is made up of 778 SNFs, 115 ALFs, 29 specialty
facilities, two medical office buildings, fixed rate mortgages on 47 SNFs, two
ALFs and four specialty facilities and eight facilities that are held for sale.
At March 31, 2020, we also held other investments of approximately $424.7
million, consisting primarily of secured loans to third-party operators of our
facilities and $194.4 million of investments in five unconsolidated joint
ventures.
As of March 31, 2020 and December 31, 2019, we do not have any material
properties or operators with facilities that are not materially occupied.
While the COVID-19 pandemic did not materially impact our rental revenue for the
first quarter and we have collected substantially all of our contractual rents
due in April, the pandemic is having a significant impact on our operators. As
of April 30, 2020, our operators reported 4,136 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 250 facilities as
of April 30, 2020, or 25.9%, of our 966 operating facilities as of March 31,
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.
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We believe many of our operators have incurred 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 and
supplies. In terms of occupancy levels, we believe many of our operators are
experiencing declines, in part due to the elimination of elective hospital
procedures, which drive post-acute skilled nursing admissions. While we cannot
at this time estimate the net impact going forward, we believe that government
relief measures at the federal and state levels, including expanded Medicaid
reimbursements, may offer meaningful support to offset a portion of these cost
increases and impacts to our operators.
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 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 CMS has required
additional reporting by operators, we may not receive accurate information on
the number of cases and may experience a lag in reporting. We expect to see
increased clinical protocols for infection control within facilities and the
monitoring of employees, guests and others entering facilities; however, we do
not know if future reimbursement rates will be sufficient to cover the increased
costs of enhanced infection control and monitoring.
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 the level of 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 during and following the
first quarter 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, 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 our actions to
date provide us with additional liquidity and flexibility to weather a potential
pronounced and prolonged impact to our business, and as such, we maintained our
dividend level of $0.67 per share for the first quarter dividend. However, we
will continue to evaluate any additional steps that may be needed to maintain
adequate liquidity.
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.
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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 five of our active subsidiaries to be treated as TRSs. Three
of our TRSs are domestic and are subject to federal, state and local income
taxes at the applicable corporate rates and the other two are subject to foreign
income taxes. As of March 31, 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 March 31,
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.
The Coronavirus Aid, Relief and Economic Security Act (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 Act defers
the application of 80% of taxable income limitation, which was added to the Code
by the 2017 Act, to our TRS's 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.
For the three months ended March 31, 2020 and 2019, we recorded approximately
$0.4 million and $0.2 million, respectively, of state and local income tax
provisions. For the three months ended March 31, 2020 and 2019, we recorded
approximately $0.6 million and $0.5 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 2019 novel
coronavirus ("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 as opposed to ALFs, all of which developments and impacts are
uncertain and difficult to predict. Due to the speed with which the situation is
developing, 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.
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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.
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,
accountable care organizations, 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.
Reimbursement 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.
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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 personal protecting equipment, 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 Department of Health and Human Services 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. 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 as opposed to Medicaid providers and have provided
limited support to senior housing operators, we cannot predict the extent to
which any of our operators will receive such funds, and what the financial
impact of receiving such funds would be on their operations.
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
will be 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 personal protective equipment ("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. Quantities shipped will be based
on facility staffing levels and PPE usage rates. 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.
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 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
could adversely affect our operators' results of operations and financial
condition, which in turn could negatively impact us.
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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 will increase 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. At March 31, 2020, 14% of our
investments were in Florida.
Texas, which represents 10% of our investments as of March 31, 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 March 31, 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. We
cannot estimate the ultimate potential impact of MFAR on our facilities in
Indiana and Texas at this time, in part as we expect any reductions in revenues
may be at least partially offset by expense reductions. 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. 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.
Medicare. On July 30, 2019, CMS issued a final rule regarding the government
fiscal year ("FY") 2020 Medicare payment rates and quality payment programs for
SNFs, with aggregate payments projected to increase by $851 million, or 2.4
percent, for FY 2020 compared to FY 2019. This estimated reimbursement increase
is attributable to a 2.8% market basket increase factor with a 0.4% 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 CMS also
adopted two new quality measures in FY 2020 to assess whether certain health
information is provided by the SNF at the time of transfer or discharge. The
two measures are: 1) Transfer of Health Information to the Provider-Post-Acute
Care and 2) Transfer of Health Information to the Patient-Post-Acute Care.
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 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. Effective 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.
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While certain of our operators could realize efficiencies and cost savings from
increased concurrent and group therapy under PDPM and some have reported some
early positive results, it is too early to assess the long-term impact of the
PDPM. Given the current and 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 could have an adverse effect on our operators' financial
condition and operations, adversely impacting their ability 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. 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.
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.
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, may conduct
audits of our operators' billing practices. Under the Recovery Audit Contractor
("RAC") program, CMS contracts with RACs 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 ("MICs") to perform
post-payment audits of Medicaid claims and identify overpayments. In addition to
RACs and MICs, the state Medicaid agencies and other contractors have increased
their review activities. Should any of our operators be found out of compliance
with any of these laws, regulations or programs, our business, financial
position and results of operations could be negatively impacted.
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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.
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.
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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.
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; 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. Effective
November 28, 2016, CMS had instituted a prohibition against the use of
pre-dispute arbitration agreements between SNFs and residents, thereby
increasing potential liabilities for SNFs and long-term care providers. On July
16, 2019, CMS lifted the ban 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.
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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. Upon adoption, we recorded an initial $28.8 million
allowance for expected credit losses with a corresponding adjustment to equity.
Transition Impact of adopting Topic 326
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