What Would Medicaid Cuts Mean to Senior Living Investors?

Will Congress cut the rate of Medicaid growth? Your guess is as good as mine. I’ll confess I get tired of everyone putting out headlines that portray some version of the end of the world if changes are made. Even the normally unbiased Kaiser Foundation has a downbeat tone to what they are posting. For example, a few days ago they released a statement about a literature survey they conducted looking at ways that the cost of Medicaid could be reduced with a conclusion that the review of the literature, “does not provide strong evidence for achieving large Medicaid savings…” If you are an investor in senior living or you are thinking about investing in this market what does all of this mean to you?

First, stay calm. The US Government has a way of changing the compensation and reimbursement rules for the senior market about every 7 years and somehow the businesses serving the market have survived and many have been thriving. A recent survey shows that 74% of the public have a positive view of Medicaid. Democrats and Republicans want to get elected so they cannot afford to ignore Medicaid. This might seem to favor the Democrats now as they can simply blame the Republicans for any changes as being “mean” or “evil”. But the costs for this entitlement are going up so much and the public cares about taxes so if the Republicans do step up to deal with the issue they may find that protecting taxpayers is a winning theme. As an investor, do not get caught up in the street fight. When the fight is over there will still be seniors who need services.

Second, look at each potential investment or each asset you own and ask, “How much Medicaid revenue is in the mix today and what will be in the mix in 5 years?” I have an investment that earns 12% cash on cash and with 120 units. We manage to keep the Medicaid population to under 10 residents as we fully understand we are subsidizing those residents. I have an investment in another community that has 72 units and well over 70% are covered by Medicaid. This also produces 12% cash on cash returns. Yes, we had to negotiate hard with the state to get fair rates. But the point is, these investments are working. Are we worried about the future? Yes, but we are still invested and doing well.

Third, learn more about Medicaid over time. Read the Kaiser Foundation web site (www.kff.org). Be a little skeptical as everyone has a position to protect. For example, while the literature survey Kaiser reported seemed a bit discouraging, there was a study conducted in 2015 in Portland, Oregon (where I live) that covered 145 housing properties and covered more than 10,000 residents that showed very convincingly that Medicaid expenses declined by 12% in one year when proper care coordination was introduced to those sites. (Search for “Health in Housing: Exploring the Intersection between Housing and Healthcare” or see: http://bit.ly/2sSwYYH) This is a big deal because at least one report shows the Senate plan would reduce Federal Medicaid payments by 24% in 2026. A 12% reduction (which was actually 16% for those over 65 in the study) could actually make a big dent in the spending. Get past the posturing and the expert opinions and look for the really possibilities to deliver value.

What Would Medicaid Cuts Mean to Senior Living Investors?

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