OREANDA-NEWS. The effects of widely anticipated headwinds for skilled nursing operators are beginning to show up in metrics causing angst amongst healthcare REITs and their bondholders says Fitch Ratings. While material and by no means a credit positive, most healthcare REITs are fairly insulated from a rating perspective. Moreover, Fitch does not expect these pressures will manifest in secular bankruptcies like those seen in the late '90s and early '00s as they are incremental changes rather than the wholesale shift from 'cost plus' (i.e. a guaranteed margin regardless of cost and efficiency) to 'fee for service.'

'Increasing coverage under Medicare Advantage is leading to shorter stays and lower rates. This, when combined with the Department of Justice investigations into billing practices and various pilot programs for bundled payments and coordinated care from the Affordable Care Act, is pressuring margins at skilled nursing facilities,' said Managing Director Megan Neuburger.

While these challenges will persist for the foreseeable future, stronger operators should be able to react accordingly. Operators' financial policies are of equal importance to changes in government reimbursement rates when determining outcomes.

As far as healthcare REITs are concerned, the market's collective memory around skilled nursing facilities is long and justifiably so. Most healthcare REITs currently have the cushion needed to manage through this environment in terms of facility level rent coverage and leverage at the REIT. Nonetheless, 'healthcare REIT equity values and capacity for external growth on a leverage-neutral basis could suffer if skilled nursing facilities continue to underperform,' said Director Britton Costa.