The Impact of New York’s Profit Caps on Nursing Home Development | Bradley Arant Boult Cummings LLP

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As we prepare to turn the page until 2022, we hesitate to continue to discuss the COVID-19 pandemic. However, the fallout continues, with new ramifications for the long-term care industry. The industry continues to come under close scrutiny in the wake of the pandemic, and New York’s legislative response to concerns is expected to affect nursing home businesses in New York City starting January 1, 2022, with a cap on eligible profits. The impact on capital spending and acquisitions remains to be seen.

Both legislative and executive, New York State began introducing new proposals impacting nursing homes in March 2021. The goal of the legislation was to ensure that nursing homes, which receive government funding, spend at least 70% of their income on direct residents. care (to patients), with 40% being used directly to pay the costs of personnel for residents, such as registered nurses, licensed practical nurses and orderlies, with requirements on the minimum number of hours that such personnel must spend with one patient per day.

Further, which is the primary concern of both elements, New York has ruled that nursing home businesses should not be operated for profit, and effective January 1, 2022, has capped allowable profits for nursing home businesses at no more than 5%, as determined by income and expenses reported in Medicaid cost reports.

The 5% profit cap excludes income that is considered extraordinary earnings. Examples of expenses that will not be allowed to be included in the profit calculation are (i) any related party transaction or compensation if the received value of the transaction is greater than fair market value, and (ii) compensation for employees who are not actively working. in or for the nursing home. All profits received above the 5% amount must be remitted to New York State by November 1 of the year following the year in which the expense is incurred. These funds must be deposited into the Nursing Home Quality Pool in accordance with Section 2808 (2-c) (d) of the New York Public Health Act.

The New York Department of Health has been tasked with establishing civil penalties for facilities that fail to meet spending requirements as of April 1, 2022. Regulations established by the department provide for penalties of up to 2 $ 000 per day for each day the installation is found to be non-compliant. These penalties can be reduced to at least $ 300 per day if there are extenuating circumstances, as set out in the regulations and determined by the ministry.

In determining whether to impose penalties, the Department of Health may also consider mitigating factors, including catastrophic events that require unforeseen expenses, the frequency (or rarity) of non-compliance by a supplier, and the ‘existence of acute regional labor shortages, which have been a constant concern for many facilities over the past two years.

The financing of real estate and nursing home operations, as with some other commercial real estate finance, is dependent on the cash flows from the tenant’s operations of the building, operations often made possible by such financing. However, New York’s new spending requirements do not allow for the inclusion of debt service, rents and leases, capital costs, depreciation of capital, or many administrative costs in the expenses recorded in the levels. of expenses required for nursing homes. This puts pressure on tenants under standard triple net leases, where tenants are responsible for paying all the expenses of a property, as tenant operators of nursing homes – the providers of licensed nursing homes – can having to choose between incurring penalties or having enough cash flow to pay the rent required by the landlord’s lender to cover debt service, property taxes, capital expenditures and other excluded expenses.

Another problem with the profit cap is what it does to the value of the property. This is important both from an acquisition point of view and from a financing point of view. From an acquisition perspective, the inability of the for-profit business developed or acquired by the current owner to continue to be reasonably profitable in the future is likely to diminish the anticipated appreciation of going concern. , making it a less attractive business model in New York State for experienced nursing home operators.

On the financing side, borrowers and lenders will need to assess how this new law will affect loan-to-value covenants. Cash flow projections are essential in assessing the value of a retirement home business. If cash flow is capped at lower than expected levels when obtaining a loan, it could potentially put a borrower in default due to their need to comply with the law.

Aside from the spotlight on the COVID-19 pandemic on the retirement home industry, this new law appears to be justified by the fact that retirement homes are the recipients of state Medicaid funding. However, income also comes from private insurance, remuneration of private residents and health insurance. These sources of income are not taken into account in the profit cap and recovery of excess amounts by New York State above 5%. Time will tell whether this law will be able to withstand the legal challenges expected on the basis of a theory of regulatory levies.

There are many factors that complicate the analysis of the impact this new law could have as the clock rolls into 2022. One thing is clear, however: New York has become a less friendly environment for retirement home businesses. at a time when the population in need of such services is only increasing.

Perhaps the expenditure on direct care, a requirement that emanates directly from the desire of officials to ensure the existence of adequate staff for the level of care required, should have been analyzed on its own without combining them with the cap on benefits. Removing the incentive to invest in infrastructure to meet the current and future demands of the elderly population can have unintended consequences.

Republished with permission. This article, “The Impact of New York’s Profit Ceilings on Nursing Home Development,” was published by Reuters December 28, 2021

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