The ongoing pandemic and changing payment models for home health gut-punched Brookdale Senior Living (NYSE: BKD) in the first quarter of 2020, but the company continues to see strong volume growth in its hospice business. 

Rising expenses and drops in occupancy and resident fee revenues in their senior housing segment took a financial toll on Brookdale, largely stemming from the economic fallout of the pandemic. The company also made a $10 million outlay in the pandemic’s early days for personal protective equipment, medical equipment and coronavirus testing, as well as cleaning and disposable dining supplies. 

The company was on a more positive trajectory through January and February but the hits started coming as the pandemic exploded in March. Brookdale expects that things may worsen in the second quarter as the pandemic continues to wreak havoc on the health care and senior housing sectors. This may be partially offset by a reduction in move-outs from their facilities, as more seniors hunker down to ride out the crisis.

“Since these expenses were only for a partial quarter and incremental labor costs are not significant in the first quarter, we expect COVID-related expenses to be significantly higher in the second quarter,” said Steve Swain, executive vice president and CFO in an earnings call. “In addition, we are in the process of testing substantially all of our community residents and associates. To mitigate these high costs, we have initiated cost cutting actions, including temporary reductions in marketing spend and canceling events and related travel. We are assessing additional reductions that won’t affect business recovery.”

The company also took action to preserve its liquidity, including drawing its available line of credit in March.

Despite the COVID-19 challenges, Brookdale’s hospice component went strong.  Brookdale’s hospice operations brought in $23 million in the first quarter, representing a 6.9% increase from the prior year’s quarter.

Brookdale in 2019 committed to growing its hospice operations primarily through de novo activity and same-store admissions. The company opened hospices in Detroit, Portland, Ore., and Sacramento, Calif last year. Patients do not have to be residents of Brookdale’s senior living facilities in order to receive hospice care

The company’s home health business —which along with hospice and outpatient therapy comprises their health care services segment — suffered as a result of the transition to patient-driven grouping model (PDGM) payment structure for home health.

Effective Jan. 1, 2020 Medicare began reimbursing home health care providers through PDGM, which classifies patients into payment categories based on clinical characteristics and other patient information, and shifts the home health payment model to a 30-day payment period rather than the 60-day episode.

The overall health care services segment saw a $9 million operating loss, including a 21.7% drop in home health revenues, which dropped to $65.9 million from $84.2 million in the prior year’s quarter. Cancelations of elective procedures in hospitals and ambulatory surgical centers caused a reduction in home health referrals, contributing to the decline.  

Despite the monetary costs, Brookdale’s investments in safety measures to combat the virus have paid off with fewer than 1% of their senior housing population testing positive for COVID-19.

“We aggressively sourced [essential supplies in high demand] from other suppliers, albeit at a large multiple of a cost that we normally pay,” President and CEO Lucinda Baier said. “The next series of pre-emptive steps included increasing communication frequency with our constituents, increasing daily observations for symptoms, limiting the size of visitor groups, canceling sponsored outings, and converting our resident engagement from in-person to virtual.”