Long-Term Acute Care Hospitals: Can They Be Financed?

Although long-term acute care hospitals (LTACHs) have been around for some time, they have historically been lost in the shuffle by financiers. While many may compare them to a traditional skilled nursing facility (SNF), there are several key differences which make it more difficult for LTACHs to obtain long-term financing. This begs the question; are there any consistent financing options for LTACHs similar to those in the skilled nursing sector? To determine the answer, we must first understand what LTACHs are and the factors which affect their financial health.

LTACH Overview

According to the American Hospital Association, LTACHs furnish extended medical and rehabilitative care to individuals with clinically complex problems that need hospital-level care for relatively extended periods of time. The major differentiation between LTACHs and SNFs is the type of care that is provided. LTACHs, much like a typical acute care hospital, provide care for more complex medical conditions than SNFs.

In 2011, Medicare recognized LTACHs for the first time. In order for LTACHs to receive reimbursement, the inpatient length of stay must be greater than 25 days. The average length of stay for an LTACH is 30 days. Typical patients require prolonged ventilator use, ongoing dialysis, intensive respiratory care or multiple IV medications or transfusions, or complex wound care.

Almost all LTACHs are licensed under the same criteria as an acute care hospital. There are some states in which an LTACH can be licensed as a “specialty hospital,” but Medicare will still certify the facility as an acute care hospital. In 2012, there were 420 LTACHs in the U.S. with over 27,000 beds. However, a moratorium placed a hold on new beds through September 2017. For comparison, according to the National Investment Center (NIC) investment guide 2014 edition, there are 11,270 SNFs and over 1.5 million beds. 

Similar to an acute care hospital, LTACHs have organized medical staff and medical executive committees. They typically receive referrals from acute care hospitals. While LTACHs can provide some therapy services, it is more likely that someone will go to a short-term SNF rehabilitation unit for therapy.

There are two primary models for an LTACH from an aesthetic standpoint. The first is a stand-alone model. In this design, similar to a hospital, the building is located on its own property and has approximately 50 to 90 beds. A “hospital in a hospital” (HIH) is the second model. In this case, the LTACH is separately licensed on the grounds of an existing hospital and there are fewer beds (30 to 40) as compared to a stand-alone model. A key benefit with the HIH model is the direct referral source as LTACHs receive a majority of their patients from hospitals. In the case of either model, the LTACHs are independently owned, operated and governed. In 2012, 60% of LTACHs were stand-alone models.

SNF Overview

Unlike LTACHs, the length of stay requirements for a SNF are not as stringent in order to receive Medicare reimbursement. With a SNF, Medicare payments begin after a three-day qualified stay. Rather than focusing on complex medical care, SNFs provide custodial care which is the highest level of care outside of a hospital for seniors. SNFs offer a community living setting for residents who are physically frail or require rehab. Typical payor mixes for SNFs largely include Medicare and Medicaid, while insurance and private pay make up a smaller portion.

There are three typical SNF models. The first is a stand-alone facility in which the SNF is operated and owned independently. The second is a continuing care retirement community (CCRC) that has a SNF located directly on its campus. The last model is a SNF that is affiliated with a hospital. Much like with LTACs, the key benefit of this model is the direct referral from the hospital to the SNF in regard to rehab patients. Figure 1 provides an overview of the key differences between LTACs and SNFs.


Financing Options

Debt financing options are numerous for both SNFs and acute care hospitals. Bond underwriting and private placements with banks remain on the forefront in the acute care hospital space. Financing via the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) can also be attractive options if the right criteria can be met. SNFs also can find financing options with banks and through government-backed programs such as HUD/FHA and USDA.

For LTACHs, however, debt financing options are much more limited. Given the length-of-stay requirement for Medicare reimbursement, traditional banks are unlikely to lend to LTACHs due to the fluctuations in cash flow caused by the higher turnover rate. Since LTACH residents typically stay for 30 to 60 days, as opposed to a SNF where stay is typically much longer, there is an increased possibility of swings in occupancy, revenue and staffing. Further, when an LTACH patient stays less than 25 days, the facility will not be approved for Medicare reimbursement.

In regards to agency financing, the FHA Sec. 242 program has given consideration to some LTACH transactions, but has not allocated any funding due to the program being designed specifically for acute care hospitals. LTACHs are typically unable to meet the patient day rule of the FHA Sec. 242 program in which they cannot have greater than 50% of patient days attributable to skilled nursing, intermediate care, convalescent care, rehabilitation, and psychiatric care.

While there are clearly more risks associated with the potential volatility of cash flow at an LTACH as compared to a SNF or acute care hospital, some finance companies and cash flow lenders still see opportunity and will consider financing LTACHs that have track records of positive cash flow. For those with less of a track record, a pledge of receivables can help finance companies or cash flow lenders to become more comfortable with the project funding. 

While the FHA Sec. 242 hospital program has yet to finance an LTACH, it is reasonable to consider whether the FHA Sec. 232 senior living program could be a viable option based on the requirements of the program. Still, based on underwriting metrics of the FHA Sec. 232 program, similar issues as with traditional bank lenders persist, especially in the case of consistent cash flow. Both programs would need to examine prospective LTACH transactions on a case-by-case basis in order to evaluate whether underwriting criteria could be met. However, even if underwriting is conservative and the project could meet underwriting criteria of either program, it is not known whether FHA would actually commit capital to the project since it does not have prior experience with LTACHs.

The Future for LTACHs

One of the major challenges LTACHs will face is growing competition. As ACOs and managed care evolves, LTACHs’ ability to cut costs and admit new patients will be tested. Given that ACOs are incentivized to improve the outcome of their patient’s care, it will likely negatively impact the need for care in an LTACH. This is ultimately because the goal of ACOs is value driven rather than volume driven. ACOs strive to prevent costly institutionalization through preventive and primary care as surpassing cost limits negatively impacts their ability to receive bonuses. However, there will always be patients who will need longer recovery times.

Despite the challenges facing LTACHs, there are still health care systems and companies that see opportunity with its market. In June 2015, Quantum International Income Corp. (QIIC) acquired Columbus Hospital LTACH, located in New Jersey. As referenced in the news release of the acquisition, new management that began at the LTACH in October 2014 has helped keep expenses stable while having a targeted marketing approach focused on finding patients with illnesses eligible for reimbursement. This has resulted in a large growth in revenue and operating income. QIIC noted that the LTACH moratorium until 2017 has left the New Jersey market underserved for those with illnesses that extend beyond the general 15-day hospital reimbursement period. 

Currently, LTACHs will have much more difficulty obtaining long-term debt financing than would a SNF or acute care hospital. This is in part due to the lack of financing options available to LTACHs as well as the foreseeable growth among its competitors. As Acute Care Organizations (ACOs) and managed care evolves, LTACHs will be further challenged to cut costs and their ability to bring in new patients will be more challenging. This may ultimately make lending to LTACHs less desirable.

Although the possibility remains that LTACHs could be financed in the future with the FHA Sec. 242 and Sec. 232 programs on a case-by-case basis, no transactions have been completed yet and modifications or waivers would likely be needed in order to make them viable options. In the meantime, LTACHs may find that finance companies offer their best opportunity for long-term debt financing.

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