Negative Operating Margins for SNFs?

Always be careful about terminology in health care, and make sure you understand what things mean, like operating margin.

It is always important to understand the definitions of certain terms, especially when it comes to health care. There has been a lot of news lately about how the median “operating margin” for skilled nursing facilities nationally has now sunk below zero. I have to admit, this drives me crazy.

The implication is that for the median nursing facility, it is operating at a breakeven level….from operations. Operations are usually defined as labor, food, maintenance, utilities, basically everything that is needed to “operate” the facility. As I said last week, if half the nursing facilities in the country could not make a positive operating margin, then capital providers are in real trouble.

But when you see these reports about a negative “operating margin,” what they are really talking about is “net income” after all expenses. That includes rent and interest expense. The actual “operating margin” for the industry comes in at about 10%, and has been declining. Not great, but at least that means that 10 cents of every dollar of revenue is available for rent or mortgage payments. There are some nursing facilities with an actual operating margin that is negative, but many of these are being sold or closed, as that type of financial performance is not sustainable. 

So, before making conclusions about what is happening, please make sure you understand what numbers people are actually talking about. The skilled nursing sector is hurting, but it is far from dead. 

 

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