Regulatory Considerations in Acquisitions of Troubled Long Term Care Facilities

Post-acute and long term care providers have endured a state of distress since March 2020, not only from the challenges created by the COVID-19 virus, but also from ever-increasing regulatory compliance burdens, changes in reimbursement rates, and uncertainty in how long term care services and support will be delivered. For example, according to the American Health Care Association’s January 2023 State of the Nursing Home Industry Survey, 84% of nursing homes reported facing “moderate to high levels of staffing shortages” and more than 50% of responding nursing homes reported they are operating at a loss and do not believe they can sustain operations at the current pace for more than 12 months.

As outlined in Buying Distressed Operations in the Skilled Nursing Facility Space, these challenges have caused many skilled nursing facility owners and operators to look for exit opportunities, often resulting in many financially distressed facilities being offered for sale. This article provides a high-level overview of the regulatory challenges that parties involved in the sale of a struggling or distressed long term care facility should consider as part of the transaction.

Successfully operating a skilled nursing facility (SNF), nursing facility (NF), or assisted living facility (ALF) requires good standing with federal and state regulators and compliance with regulations. At the most basic level, every facility must be licensed to operate within their state, which requires compliance with state regulations and regulatory bodies. SNFs and NFs must additionally ensure they comply with federal requirements of participation (ROPs) issued by the Center for Medicare and Medicaid Services (CMS). A facility that continually fails to comply with ROPs will find itself facing fines, increased oversight, and ultimately the decertification of the facility with CMS, rendering it ineligible to bill for Medicare and/or Medicaid patients.

When a transaction involves a facility that has had compliance issues or is facing additional scrutiny from state licensure agencies or CMS regulators, the parties need to give heightened attention to the regulatory considerations of the transaction. For example, does the facility’s history of non-compliance complicate the licensure change of ownership process with the state licensure agency? Is the SNF at risk of being classified as a “Special Focus Facility” by CMS and thus at increased risk of additional surveys, increased fines, or decertification for Medicare and/or Medicaid participation in the near future? If the facility has been decertified from Medicare or Medicaid, does the buyer understand what will be required for that facility to regain a Medicare provider agreement and the ability to bill for Medicare- or Medicaid-eligible services? Using these circumstances as examples, we offer a few recommendations from our experience.

First, the buyer’s most important initial task is conducting sufficient diligence on the regulatory problems with a distressed facility and understanding the facility’s history of non-compliance. It has become common for purchasers to request survey reports, review CMS special focus facility listings, and metrics such as star ratings on CMS’s CareCompare. Buyers may wish to take additional steps when buying a distressed facility, however. For example, a buyer should ensure someone on their team can meaningfully review survey reports — especially ones with serious deficiencies. Understanding if non-compliance has continued over time — and if so why — is also critical. A buyer generally purchases, and assumes the risk for, not only the facility’s physical assets, but also the employment of the current staff. A buyer should assess the capabilities of the current staff and management team to successfully operate the facility.     

We recommend buyers engage with state regulators early and continuously throughout all phases of the transaction, and if the subject facility is a certified Medicare and/or Medicaid provider, the appropriate agency office. Many times, regulators will welcome a change in control of a “troubled” facility and appreciate the opportunity to be introduced to a new owner or operator. If there is an urgent need to change operators (e.g., because of a receivership appointment or foreclosure proceeding), a good working relationship with regulators can help a buyer to accelerate the timetable to process a change of ownership application. State regulators recognize that it is rarely in the best interest of the state or the residents of a distressed and non-compliant facility to displace its residents, and buyers can strategically enlist state regulators as an ally to assist in taking steps to expedite a change of ownership to prevent a facility from closing and displacing its residents.     

Buyers should also pay careful attention when acquiring a facility that is either on or is a candidate for the Special Focus Facility (SFF) list. CMS created the SFF program to address facilities with a “yo-yo” or “in and out” compliance history that CMS believes have underlying systemic problems giving rise to repeated cycles of serious deficiencies. Periodically, CMS updates and publicly posts the SFF list to reflect the compliance status of CMS certified providers across the nation. Buyers should understand that even after a change of ownership, a subject skilled nursing facility will stay on the SFF list (notwithstanding the change of ownership) and will remain subject to more frequent and detailed regulatory surveys for compliance with the requirements of Medicare and Medicaid participation. A buyer of a SFF needs to have an operational plan for how the facility will improve compliance and “graduate” from the SFF list.

In some situations, especially with SNFs, CMS may have already decertified the facility, or state regulators may have suspended or restricted the license. Usually in those cases, the facility has had to close and discharge residents. In the case of SNFs, Section 2016 of the CMS State Operations Manual (SOM) explains the certain criteria that a decertified facility must meet to regain eligibility for Medicare or Medicaid participation. Specifically, the provider must operate for a certain period of time without the reoccurrence of the deficiencies that were the basis for decertification — known as a “reasonable assurance” period. The CMS Survey and Operations Group Locations (formerly the CMS Regional Office) in each region have complete discretion over the length of the reasonable assurance time period, and the length of the period mandated depends on an evaluation made by CMS of the provider’s previous history of compliance. Any incoming buyer needs to understand how long they will need to operate without Medicare and Medicaid reimbursement payments while coming back into the program, and how that will affect working capital requirements.

Buyers have opportunities to capitalize on often favorable pricing for troubled long term care assets, but must have a skilled management team and experienced operational staff equipped to handle the regulatory hurdles necessary to turn the operations and compliance around for success.  Thoughtful buyers should enlist the help of experienced service providers in the long term care industry to serve as a guide and liaison to the relevant regulators early in their transaction process to set the turnaround project up for success starting on the closing date.