For many health systems, the skilled nursing facility is one of the few service lines that consistently loses money year after year. According to MedPAC’s March 2026 Report to Congress, hospital-based SNFs operated at a -38% FFS Medicare margin in 2024. The reason is not mismanagement. It is a structural mismatch between what it costs to run a nursing facility inside a health system and what the reimbursement model pays for one.
Hospitals pay hospital-grade wages and benefits. That cost structure is appropriate for an acute care setting billing thousands of dollars per patient day. It does not work in a post-acute setting billing hundreds. The gap rarely closes through operational improvement alone. It is built into the cost base from the start.
Why Health Systems Have Kept Their SNFs Anyway
Despite the financial drag, most health systems hold onto their SNF facilities, and there is a rational explanation for it. Hospital administrators evaluate SNF facilities in the context of the hospital’s overall financial performance, not as standalone businesses. A hospital with its own SNF can transfer patients out of inpatient beds and into the SNF once those patients no longer need acute care, lowering length of stay and freeing up capacity for the next admission. When a hospital bed costs thousands of dollars a day to operate, the ability to move stable patients downstream quickly is worth a great deal, even if the SNF runs in the red.
The mission dimension matters too. Hospital-owned SNFs often carry a disproportionate share of Medicaid-dependent and charity care patients, and health system boards have historically viewed that as part of the institution’s community obligation. The concern that an outside operator would not maintain that commitment has kept many health systems from exploring a sale at all.
The concern extends beyond clinical care. These facilities employ hundreds of staff members, many of them long-tenured, with deep roots in the communities they serve. The residents who live in them have built relationships with those staff and with the facility itself. A sale introduces real transition risk for both, and health system boards feel accountable for that outcome in a way that extends well beyond the financial transaction.
All three are legitimate, and none of these require the health system to keep owning the facility to preserve what it values.
The Quality Paradox
Here is something the financial data alone does not tell you. Hospital-based SNFs are among the best-performing in the country on clinical quality metrics, and MedPAC’s 2026 report documents it across every major measure.
Hospital-based SNFs provided 0.8 RN hours per resident day in 2024, compared to 0.5 for freestanding SNFs. That 60% difference in RN coverage shows up directly in outcomes. Hospital-based SNFs had higher successful discharge-to-community rates than for-profit and freestanding SNFs. They had lower potentially preventable readmission rates. They were less likely to carry a 1-star CMS rating and more likely to earn 5-star ratings on both overall performance and staffing. Their nursing staff turnover was lower than at for-profit facilities.
The quality is real, it is documented, and it is expensive. Hospital-based SNFs perform well precisely because they staff the way hospitals do. That cost structure is what the reimbursement model cannot support.
The actual problem is not that these facilities are poorly run. It is that they are run to a clinical standard the SNF payment system was never designed to fund.
The Best of Both Worlds
Here is what changes the calculus. According to MedPAC’s March 2026 report, freestanding SNFs generated positive margins in the mid-20% range, compared to the -38% margin hospital-based SNFs carry. That spread exists not because the operator is doing something the health system cannot, but because their cost structure was built for this setting. SNF-level wages, SNF-level benefits, an operating model calibrated to post-acute reimbursement.
The health system does not have to give up the inpatient throughput benefit to capture that difference. The right buyer has every incentive to maintain the referral relationship with the hospital. Their census depends on it. An operator who significantly restricts the hospital’s discharges risks losing the volume that supports the acquisition in the first place. That alignment of interests is structural.
In some cases, health systems assume selling the SNF means losing control of discharge flow, only to find that a well-selected operator maintains or even increases acceptance rates because their model depends on consistent hospital volume.
The quality concern is addressed through selection, not conditions imposed after close. Before any offer is evaluated on price, we run every prospective buyer through a detailed scorecard that covers both quantitative metrics and qualitative factors. On the quantitative side, that means CMS star ratings across their full portfolio, RN hours per resident day, readmission and discharge-to-community rates, nursing and administrator turnover, and survey history including Special Focus Facility designations.
On the qualitative side, it means evaluating the depth of the operator’s information technology infrastructure and their track record with clinical platform migrations, their experience operating in the specific state and market, and whether their leadership team has actually executed this kind of transition before. The difference between an operator who looks good on paper and one who can actually perform through a complex hospital SNF transition often comes down to factors that never appear in a LOI. An operator who has consistently delivered strong clinical outcomes across a mixed-payer portfolio does not need to be told to maintain standards, because their record already demonstrates what they are capable of. A process built around evaluating that history, rather than taking commitments at face value, is what gets a health system to a buyer they can actually trust.
What the Numbers Are Actually Saying
A health system running its SNF at -38% and justifying it through inpatient bed capacity is paying a significant ongoing subsidy for a benefit it could retain without continuing to subsidize it through ownership. The facility moves from a recurring loss on the balance sheet to a closed transaction, with the same discharge pathway intact, the same patients served, and an operator whose entire business model is built around making that facility perform.
To put that in concrete terms: at a -38% FFS Medicare margin, a facility absorbs $0.38 in losses for every Medicare dollar it bills. For a hospital-based SNF with $5 to $10 million in annual Medicare revenue, that translates to $1.9 to $3.8 million in recurring annual losses on that payer alone.
There is one more dimension worth naming. A hospital that wants a reliable long-term referral partner should want that partner to be profitable. A SNF operator running on thin or negative margins will eventually make the decisions that struggling operators always make: tighten admission criteria, reduce staffing, defer capital, or exit the market entirely. None of those outcomes serve the hospital. Financial sustainability in the hands of the right operator is not a secondary concern but the condition that makes the referral relationship durable five years after close, not just in the first year when everyone is still paying attention. A profitable SNF partner reinvests in the facility, maintains the staffing levels that support complex admissions, and has the operational stability to honor those commitments long after the transaction closes.
The question for most health systems is not whether the financial case exists for a sale. According to MedPAC, it clearly does. The question is how to run a process that finds the operator who can handle both ends of the patient mix, higher-acuity short-stay rehab cases and long-term Medicaid residents, maintain the clinical standards the health system’s reputation depends on, and still be the right partner five years after close.
How to find that operator, and how to structure a process that gets to the right answer, is what the next article in this series covers.
Next: The Buyer Your Hospital Wants vs. The Buyer Your Hospital Needs
Senwell Senior Investment Advisors advises the nation’s largest integrated health systems, as well as regional and county-run hospitals, on the sale of hospital-affiliated skilled nursing, seniors housing and post-acute care facilities. For a confidential consultation, contact a Senwell advisor info@senwelladvisors.com.