Hospice Census: Where’s It At?
A common question I am fielding has to do with the current “no growth” pattern of hospice census; in some cases, decline is more operative of the pattern. Briefly, there are a number of factors at play, some recurring themes and some driven by more aggressive CMS intervention.
- The biggest culprit in the current no-growth situation is the economy. I’ve written about this issue before but it clearly bears repeating. In a down economy, paying patients are more scarce than in a healthy(ier) economy. Assuming as has been the case, provider growth or supply hasn’t declined substantially (if at all) during the recession to current level of stagnation; the same number of providers are chasing a lesser number of “paying” patients. The reality is such that each provider seeks patients that can pay and ranks or grades patient value by payer source; some patients are worth more than others. As hospice is primarily a “down stream” referral, generally coming from an acute environment, the base of referrals starts with the supply of paying patients within the hospital. For most if not all hospitals, patients with good private insurance are the most prized. Medicare comes next and Medicaid next and everything else well below. For hospice, the bulk of referrals are Medicare followed by Medicaid and private insurance to a far lesser degree. When the supply of patients with private insurance declines due to economic malaise for a prolonged period (as current with high unemployment) and the level of elective procedures dies rapidly, all other paying patients become more prized by the hospital; their value increases. As the value of these other patients rises and isn’t replaced quickly with private insureds, the realization of keeping Medicare and Medicaid patients within the system and the hospital as an economic necessity (paying the bills) trumps the value of referring down stream. In short, the demand from a supply of private insureds for beds and services isn’t great enough today to push these other patients out of the acute system. Economically speaking, if I am a hospital, I will maximize whatever revenue source is available to me such that doing so is better than nothing as no immediate alternative or replacement is available.
- While overall census hasn’t grown much over the last few years (if at all), CMS’ concern regarding the composition of hospice census has. The primary focal point is around nursing home patients on hospice and their proclivity as a sub-group to account for longer lengths of stay. Not surprising, as the sources for non-nursing home patients have remained stagnant or declined, hospice activity in nursing homes has steadily increased. What CMS is concerned about today is the growth of the longest stays, principally where these stays occur and what diagnoses correlate to these stays. A notable aside and one that cannot be ignored is the type of hospice ownership that seems to drive the majority of long-length stays. The facts below combined with an OIG workplan emphasis that is focused on reviewing the business relationships between hospices and skilled nursing facilities correlates directly to a softer environment for census gains derived via nursing homes. If the term Hawthorne Effect (behavior modification that occurs as a result of being watched or monitored) comes to mind, I’ve made my point.
- The longest stays occur on average, in nursing homes and assisted living environments.
- The average length of stay in-service for a for-profit hospice is 30 days longer or 33% longer compared to a non-profit hospice.
- The bulk of industry growth in terms of organizations providing hospice has been for-profit, free-standing hospices. The rest of the industry growth has remained essentially flat.
- For-profit margins of free-standing hospices average 10 to 11% compared to non-profit margins of 3%.
- A recent OIG report on hospice care provided in nursing homes found that 82% of the cases reviewed did not meet Medicare coverage requirements.
- In the grand universe of all health care options, hospice care remains a decided niche’. For non-health care people, its tough to wrap your head around a care approach that by its nature, offers no “curative” option. For all too many individual patients and their families, this option is too often viewed as “giving up”.
- Marketing has caused some erosion but marketing on behalf of non-hospice providers. Cancer remains the primary cause of a hospice referral yet for every hospice advertisement I encounter, I encounter a literal ten to one (if not more) advertisements for hospital-based cancer treatment programs or distinct hospitals (think Cancer Treatment Centers of America). While I know the overall survival numbers, costs, logistics, etc. as well as any one, the general patient and their family does not. The treatment approaches are phenomenally positive and reassuring regarding themes of “hope”, “cure”, etc., even for the most desperate of diagnoses. The hospice message is frankly trumped quickly as to the unitiated, it is still about death. The result: Referrals that should have come sooner perhaps are not coming at all or coming closer to the final days.
Taken the above into account and CMS data regarding a projected growth in outlays for FY 2012 of 2.8% (Medicare), an amount that is almost entirely rate driven, expect continued stagnation on the census side. Until the economy improves and more certainty is forward on the future of health care reform, growth in terms of new volume is not soon to arrive.
SNFs: What to do Now for October 1
As known by now, a lot of change is occurring with Medicare effective 10/1. Daily, I field questions from around the country regarding what exactly is happening and what if anything an SNF should do to “minimize” the impact. To a certain extent, at least as far as reimbursement reductions go, it is difficult and ill-advised to adjust too hastily or rapidly. Longer-term planning is required to fundamentally, re-balance a payer mix. This said however, all SNFs should be looking at their business models realizing that the long-term rate outlook on Medicare is best case flat, most probable declining.
Below I’ve accumulated and summarized, my top five recommendations/answers to the most common “what do we do next” questions. For reality purposes, I assume (as it will happen) that rate reductions as called-for in the CMS final PPS rule will occur. I understand that Congress may choose to intercede but given my sense of the current political climate and the economic issues at hand, I think it ill-conceived not to assume reduction and bet on “lobbying” to reinvent higher rates.
- Begin Balancing Your Payer Mix: Out of all of the SNFs I have analyzed recently, those that have a truly balanced payer mix with appropriate revenue sources will fare well to fairly well, even with the pending Medicare cuts. Balanced looks different to different SNFs but in reality, they all share common traits. First, Medicare isn’t their sole source of margin. Second, their Medicare case-mix is well mixed with rehab and clinical qualifiers, perhaps a shade more clinically complex than rehab only. Third, they have strong overall clinical competencies and thus, attract patients with other payer sources such as private insurance. Finally, Medicaid is equal to or less than a third (no more) of their payer mix. To balance an SNF payer mix, the facility/organization must undertake a strategy to define service/product mix, add clinical competency, build referral sources for different patients, and improve overall operating efficiencies aligning staffing and service delivery with effective care outcomes. This strategy is not about optimizing Medicare reimbursement (though it does that), it’s about building a care engine that performs across payer sources.
- Develop a Solid Understanding of Medicare Reimbursement: Many providers I talk with have only a rudimentary understanding of the current PPS system and most of what they have learned comes from the wrong sources; sources that are partial to a particular bent or issue. Even with the cuts, providers who understand how to take advantage of caring for a more clinically complex patient profile and get reimbursed for their work, aren’t horribly at-risk for major revenue swings. They have developed internal core competency in coding, in managing the length of stay, and in capturing the true care needs of the patient. They bring in the necessary training resources and have staff resources that help maximize their productivity and care delivery. They know how the system works, don’t try to deny the changes, and develop the systems and the people necessary to be current, use the MDS effectively and capture the dollars in the form of reimbursement, correctly.
- Analyze the Impact: If reimbursement cuts are forthcoming, and they are, I hear too many vague generalities about how much and “the sky is falling” rhetoric. Frankly, most providers I talk with haven’t modeled the financial impact as of yet and as the old adage goes, “you can’t begin to fix what you don’t know is broken”. In some cases, simple tweaks to operations can improve the actual impact. In other cases, changes to internal delivery systems, coding, etc. can improve the revenue impact (positively). Suffice to say, knowing what the impact is today can help a provider hone in on what options are available to mitigate the “pending” damage.
- Understand the Totality of What is Changing: It is easy to reflect solely on one element of the Medicare equation that is changing in October; revenue or reimbursement. The problem most providers also face is that certain systemic changes are occurring such as the allocation of treatment time for group therapy, the requirements for End of Therapy OMRAs and the Assessment Reference Date windows. As October 1 is 30 days away, providers should have already gotten up-to-speed on these changes and begun implementing policy, procedure and systemic internal changes to address the new requirements. As change requires education, adjustment, audits and then additional education and/or adjustments, starting too late equates to getting claims wrong. Ask any provider that has gone through a probe or had claims rejected what that revenue impact is; far worse and impactful than a rate cut.
- Focus on Therapy: When I encounter SNFs with major Medicare issues, I see three common problematic themes. First, for facilities that use outside therapy or contract therapy providers, the facility has “washed” their hands of the Medicare therapy issues. This is a problem on so many levels. As I have written before, the therapy company is not the provider, the SNF is. Under Part A, the SNF is always the provider and as a result, any problems caused by incorrect billing, improper care, improper coding, etc., perpetuated by a contractor is a problem for the Part A provider. Basically, the liability cannot be ceded to a contractor. The SNF must know as much about the provision of therapy under Part A as it does the provision of nursing care or any other discipline. And most important, while therapy companies claim that they develop partnerships with SNFs, the reality is far from a true partnership. For a partnership to actually occur, the risks and benefits must be equally shared. Such is not the case in these relationships. In this relationship, each (the SNF and the therapy company) have different business and profit motivations such that at times, the interests may compete in ways deleterious to the SNF, left unabated. Second, if a provider has its own program and staff, the therapy component is rarely fully integrated with all other care disciplines. In short, all too often therapy is looked at as purely a profit center rather than an integral part of the clinical care delivery an SNF provides. Therapy involvement, assessment, and integration into the total care plan of all residents/patients prevents problems in terms of care outcomes, helps capture additional revenue via reimbursement, and improves the overall clinical competency of the care team. Third, all too many administrators have no idea the role therapy provides in their Medicare or general care delivery. Suffice to say that if an Administrator wants higher per diems, better care outcomes, better compliance results, its time to learn the overall MDS and understand where therapy integrates in Medicare, how this system works (not just the revenue generated) and how therapy can improve the overall operating performance of an SNF (revenue and expense).
Before I conclude, I have three remaining suggestions to issues that I commonly address in the SNF world. These suggestions are pertinent at all times for an SNF that is seeking to improve its operations, regardless of the reimbursement issues that are “at-play”.
- Develop Centers of Excellence: Trying to be all things to all patient types, etc. in an industry segment as wide as the SNF arena is a recipe for failure or at best, average to below average results (operating and other). Not every SNF will excel in a post-acute, transitional care environment. Markets are different, referral source needs are different, etc. By developing an acute awareness of market needs, referral source needs, etc., an SNF can focus-in and develop, centers or “lines’ of care excellence. Three things happen or should with this approach. First, occupancy issues are less prevalent. The SNF knows its flow of patients and can set aside the right amount of capacity for the length of stay and volume requirements dictated by a group of patients. Second, efficiency in terms of staffing, supplies, programs, care plans, etc. can truly be developed. Third, building a true revenue model is far easier. A revenue model is driven by an expectation of certain occupancy, revenue streams from each patient type, and pricing/reimbursement models that accentuate revenue. Expenses can then be matched accordingly.
- Suppress and Evaporate “Stupid Money”: Stupid money is dollars that are spent on things that can be controlled by an SNF or any business. It saps resources and margin. Common locations of stupid money are Worker’s Comp, agency use, over-time, supply waste, improper coding, fines, forfeitures, billing errors, staff turnover, and compliance/legal issues. Minimizing the dollar flow and/or eliminating it for “stupid money” immediately improves the bottom-line. I don’t know how many dollars over the years I have seen across all of the facilities I have been in that get wasted repeatedly, on stupid money issues.
- Develop Care Systems/Algorithms: SNFs that really excel financially and from a care/outcome perspective, have gotten very good at developing common protocols and algorithms for common admission diagnoses. They have become efficient and effective at delivering high quality, lower cost care by reducing the variances and treatment fluctuations that arise when care is unplanned or uncoordinated. They have developed formularies, treatment protocols, and outcome-based algorithms for the most common types of admissions and issues faced by patients within their settings. Some have gone as far as to coordinate this work within their upstream and downstream referral networks (home health on discharge, hospital on admission/re-admission). These SNFs make solid, repeat margins, have balanced payer mixes and are positioned appropriately for the next foray into healthcare reform; namely bundled payments, competitive bidding, ACOs and quality-based incentive payments.
Post-Acute Outlook Post Debt Ceiling, Post Medicare Rate Adjustments, Etc.
OK, the title is a bit wordy and trust me, I could have included more “posts” but I think I got the point across. First, I’ll admit to having a crystal ball however, the picture I see is a bit like the first (and only) television set I remember having as a kid: Not in color, lines running vertically and horizontally, snow, and an antenna that required frequent manipulation and tin foil to get any kind of reception. And of course, there were only three channels available. The same today is true about my crystal ball on health policy and what to expect in the post-acute industry.
My crystal ball’s three channels are Medicare, Medicaid and the Economy. Reviewing each, here’s the programming I see for the fall lineup or if you prefer, the period post October 1 (fiscal year 2012) through early next year.
The Economy: The debt ceiling discussion and the actions taken by S&P and the Fed in the last couple of weeks are a reminder via a cold slap, of how mired in dysfunction Washington remains and how moribund the economy truly is. While technically not in a recession, the economy is not really growing either; a growth rate of less than 2% in GDP is like treading water. For unemployment to change, consumers to return and capital to re-enter the business investment side, GDP growth needs to be above 2% and ideally north of 4% for a sustained period. Unfortunately, in order for this to occur, fiscal policy in Washington needs to develop some semblance of coherency and consistency.
What I know from my economics training and background and my last twenty-five years plus in the healthcare industry boils down to some fairly simple concepts. These concepts are I believe, a solid framework for providers to use in terms of planning for the near future and even somewhat beyond.
- The U.S. debt level is fueled to a great degree by entitlement spending, less so by discretionary spending. If the prevailing wind is about debt reduction and balance in the federal budget (or getting closer to balance), two things must occur. First, spending constraint where spending primarily occurs, namely entitlements. Second, revenue increases in some fashion, namely taxes. The devil as we know it today, is how and where on both sides of the ledger (revenue and expenses). Spending reductions alone are insufficient, unless dramatic, to significantly lower the debt level or balance the budget; particularly in a period of near zero economic growth. Dramatic spending reductions are clearly unwise and potentially, deleterious to an industry sector (healthcare) that continues to provide steady employment. Similarly, for spending reductions on entitlements to truly have a positive impact and make sense, program reform must be at the forefront of “why” less spending is needed or warranted. Program reform, ala the health care reform bill which didn’t really reform Medicare or Medicaid but added new layers of entitlements, is far from the answer. For providers, there is no immediate or for that matter, longer-range future that doesn’t entail less spending on Medicare or Medicaid. As the only “trick” in Washington’s bag or the bags contained in the statehouses is rate cuts, anticipate and plan for the same.
- A lackluster, no growth economy with high unemployment levels fuels provider competition wars over paying patients. As fewer paying patients are available and/or fewer “good” paying patients are available, providers will compete for the same market share within and across the industry levels. What this means is that providers will seek to acquire market share within industry segments (home health, hospice, SNF, etc.) and across industry levels (hospitals seeking to maintain patient days versus referring to post-acute providers). The end result is more or similar levels of M&A activity, if capital remains available, and thus, consolidation that is driven primarily by market share motives.
- According to a recent healthcare expenditure outlook released by CMS, healthcare spending is projected to reach $4.6 trillion by the end of the decade, representing nearly 20% of GDP. The primary contributor to this projected level of growth is the Affordable Care Act, principally due to the expansion of Medicaid and the requirements for private insurance coverage (Medicaid growth of 20.3%). While CMS notes that Medicare spending may slow somewhat, this assumption is predicated upon the continuation of spending cuts and a 29.4% reduction in physician payment rates required under the current Sustainable Growth Rate (SGR) formula. Assuming, as has historically occurred, Congress evacuates the cuts called for under the SGR and as has been discussed, moves to a formula tying payment to the Medicare Economic Index, Medicare spending accelerates to a 6.6% growth rate (1.7% projected for 2012 with continuation of the SGR). Summarized, health spending is the two ton gorilla in the room and it will continue to have a heavy, significant influence on economic policy discussions at the federal level and beyond. Though I don’t agree with the recent rating action taken by S&P, it is impossible to ignore the consensus opinions of allof the rating agencies: Entitlement spending, namely driven by healthcare spending, is unsustainable at its present level with the present level of income support (taxation) and as long as the status quo remains fundamentally unchanged, the U.S. economy is not fundamentally stable.
- Current economic realities and the rating agencies actions and statements foreshadow a stormy, near term future for the healthcare industry. As is always the case, there will be winners and losers or more on-point, those more directly impacted and those less so. On the post-acute side, excluding reimbursement impacts, I’ve summarized my views on what I see in terms of economic impacts for the near term (below).
- The credit rating side will remain pessimistic for most of the industry “brick and mortar” providers. Moody’s, Fitch, et.al. will continue to have negative outlooks on CCRCs, SNFs, etc. primarily due to the economic realities of the housing market, investment markets, and reimbursement outlook. Within this group of brick and mortar providers, Assisted Living Facilities will fair the best as they are the least impacted by the housing market and for all intents and purposes, minimally impacted by reimbursement issues (save the providers that choose to play in the HCBS/Medicaid-waiver arena).
- The publicly traded companies (primarily SNFs but home health and LTACHs as well) will continue to see stock price suppression due to the unfavorable outlooks and credit downgrades provided by the rating agencies. This will occur regardless of the favorable earnings posted by some of the companies. Reimbursement trends (down) are the primary driver combined with the hard reality that Medicaid is in serious financial trouble, even more so going forward as enrollment jumps due to continued healthcare reform phase-in schedules.
- Capital market access will continue to be tight to inaccessible for some providers. Reimbursement, negative rating agency outlooks, lending/banking reform, above historic levels of failures/bankruptcies, etc. all continue and will remain as an overhang to the lending environment. Problems with potential continued stable to increasing funding levels at Fannie, HUD, etc. create additional credit negativity and tighter funding flow. Capital access, when available, will continue to have a credit premium attached, in-spite of low base rates. I expect to see continued development and demand for private equity participation.
- Given the above, financially driven mergers and acquisitions will remain somewhat higher as organizations seek to use the M&A arena to create financially stable partnerships and bigger or larger platforms from which to derive credit/capital access.
Medicare: The problems with Medicare are too deep and lengthy to rehash here and thus, I’ll move to brevity. Medicare is, as I have written before, horribly inefficient, bureaucratic, and inadequately funded to remain or be, viable. As a result, only two real scenarios exist today: Cut outlays or increase revenues. Arguably, a third that involves portions of each scenario is the most probable solution. Real reform is light-years away as the current and forseeable political future foretells no scenario that includes a Ryanesque option (Paul Ryan plan from the Republican Congressional Budget and/or Roadmap for America). Viewed in this light, the Medicare outlook for post-acute providers is as follows.
- For SNFs and Home Health Agencies, reimbursement levels are on the decline. The OIG for CMS and MedPac have each weighed-in that providers are being overpaid. Profit margins as a result of Medicare payments or attributable to Medicare, are deemed too high (mid to upper teens) and as such, the prevailing wind is payment or outlay reductions. The bright-side if such exists, and as I have written before, this “cutting” trend will impact some providers far more than others. The providers that have relied heavily and primarily on certain patient types for reimbursement gains will be more negatively impacted than providers with a more “balanced” book – a more diverse clinical case mix. The movement is toward a more balanced level and thus lower level, of reimbursement theoretically closer aligned with the actual clinical care needs of patients. Providers with more diverse revenue streams and more overall case-mix balance will not be as adversely impacted although, the Medicare revenue stream will be lower or less profitable.
- Hospice has remained relatively unharmed, principally due to its lower overall outlay from the program. It remains a less-costly level of care than other institutional alternatives. A note of caution here is important. While rates have not been cut, program reform is occurring on the fringes and I suspect a wholesale re-design of the Medicare Hospice benefit is forthcoming. In such a fashion, payment reform rather than rate reform or reduction will occur. The obvious trend is to restructure payments away from a reward for lengthier stays and to require more precise determinations of terminality, tied to a tighter or imminent expectation of death. OIG and MedPac have issued a number of papers and memos regarding the relationships between Hospice and SNFs that correlate to longer stays for certain diagnoses. Summarized, payment reductions via rate are less of an issue but utilization reform is forthcoming via additional regulation designed to reduce overall payments to Hospices or as CMS would say, to more closely align payments to the real necessity of care for qualified, terminally ill patients. Without question, the largest impact (negative) going forward will be on hospices that have sizable revenue flows tied to nursing home patients.
- LTACHs are in a similar reimbursement boat as hospice; small overall outlay within the program and for the past few years, minimal expenditure growth. The industry is from a cost perspective, fundamentally flat. What will be interesting to watch is whether under certain aspects of healthcare reform, this niche’ takes on a growth spurt. Bundled payments, ACOs (Accountable Care Organizations), and shifts in SNF reimbursement away from higher acuity, rehab patients may lead toward more utilization of the LTACH product. This being said, the prevailing Medicare reimbursement profile is fundamentally flat. Given a bit more creativity on the part of the LTACH provider community, this segment may be poised for some growth, although not directly via increasing payments.
- The most uncertainty lies on the Part B provider side, particularly providers that are reimbursement “connected” to the Physician Fee Schedule (therapy for example). As of today, the required change to the fee schedule as a result of the Sustainable Growth Rate formula is a fee cut of 29.4%. It is quite possible, due to the current negative or flat growth trajectory of the economy, and sans any change in the law, for fees to be cut again in 2013, barring Congressional action. Most acutely impacted in this scenario are physicians and predominantly, primary care physicians. I have yet to see a Congress that fails to intercede and repair cuts this draconian but the political times and the budget deficit debates are markedly different than during any prior period. Critical to whether this cut or some level less than this is implemented is the issue of access, already a hot topic for physicians. Physicians, particularly primary care specialists, are already in short-supply nationally, woefully short in certain markets. If cuts of this magnitude or perhaps any magnitude roll forward, I suspect many physicians will curtail or close their practice to new Medicare patients. On the other side represented by non-physician providers, Part B cuts of this magnitude will no doubt limit service and access. Fixing the formula and the law has been difficult for Congress as the dollar implications are substantial. I foresee another round of patches, etc., occurring close to the “cut” date, especially since 2012 is an election year.
Medicaid: For as many reasons as Medicare is a mess, Medicaid is as well, though magnified by a factor of two or more. Medicaid’s biggest problem now is rapid growing enrollment, primarily due to high unemployment and upcoming federal eligibility changes mandated via the Accountable Care Act (healthcare reform). Given Medicaid’s current funding structure, this issue poses huge problems in flat to negative growth economies. States simply due not have the revenue to create a higher matching threshold or level, necessary to achieve more federal dollars. In July, the enhanced federal match provided via the Recovery Act (stimulus) sunsetted leaving states with huge structural deficits and the prospect of deficit growth due to increasing enrollment. In virtually every state, rate cuts have been discussed and in half-again as many, implemented. States continue to move to the federal government seeking relief from required or imputed service provision requirements and/or relief from eligibility requirements (waivers). The inherent difficulty with balancing Medicaid funding is that the same is directly tied to stable to growing state revenues and a clear picture of population risk or need. Changing (increasing) populations often present adverse-risk scenarios, creating higher than normative utilization. For obvious reasons, lower than market reimbursement levels, access is a big issue. Not all providers willingly and openly desire Medicaid patients and those that do are not on the increase. Without additional funding assistance at a level beyond what is called for in the Accountable Care Act, regulatory relief and an improving economy, the reimbursement prospects under Medicaid are all bleak.
- In the post-acute environment, the biggest impact of this continued ugly Medicaid scenario will fall directly on SNFs. Matching prospective or real Medicaid cuts with Medicare cuts forthcoming is a true “negative” Perfect Storm. For most SNFs, Medicaid is the largest payer source and until recent, Medicare was used as a make-up funding source for Medicaid reimbursement shortfalls. Adding fuel to an already smoldering fire, the suppressed earnings available to seniors, no growth in Social Security payments, and a stock market that presently produces only a flat return trajectory limits the pool of private paying and privately insured patients. In short, there is no additional room on the revenue side to make-up an SNFs Medicaid losses. For SNFs, only the few that have limited leverage, high occupancy, an extremely balanced payer mix, and stable staffing will weather the Medicaid near term future; a future of no rate increases or likely cuts.
- While not a huge segment of the post-acute environment, HCBs providers will feel the Medicaid pinch as well. As a result of needing to reign in Medicaid spending, states are rapidly curtailing their funding and payment levels for HCBs programs. While most states still claim that HCBs expansion would help soften their Medicaid deficit, states that bit a big bullet in this arena early on (California for one), now realize that waiver programs produce massive new levels of beneficiaries who want and need access to community support services. SNF access was already somewhat limited as the industry has truly shrunk but the demand for services in this growing eligibility pool has expanded. Funding these services is becoming a real problem for states and as such, support payments will remain flat, decline and program growth will be capped.
- Home Health will also feel a bite from declining Medicaid funding although its Medicaid utilization levels are modest at best. For Home Health, Medicare is the big dog and Medicaid a minor element. Staffing costs are on the rise for Home Health as the competition for home health aides in many markets is brutal or getting rough. Competition, even in a high unemployment environment, for certain categories of employees, raises wages and benefit costs. Staffing is the largest expense for a home health agency and as such, a scenario with rising employment costs and flat to declining reimbursement negatively impacts margins. I don’t see this scenario changing any time soon.
Concluding, this may be one of my most depressing posts, if for no other reason than the current external view is dreary and nothing foreshadows improving weather. For brick and mortar providers, capital access is critical, especially for SNFs who have as a profile, some of the oldest physical plants. SNFs are capital-intensive operations and without an ability to fluidly and reasonably, access modest cost funds, deferred maintenance (already high) will increase. With so much revenue tied to reimbursement and a reimbursement outlook that is negative, it is unlikely that capital will flood back to the post-acute industry. Critically important to the viability of this sector is an improving economy combined with regulatory reform that, if reimbursement remains flat, allows providers to become truly more efficient. In short, increased program revenues under Medicare and Medicaid due to economic growth, will ease a lot of the immediate crunch and perhaps, buy sufficient time for absolutely critical, health policy reform.
When and Why Projects Go Bad: Traps and Pitfalls to Avoid
Creeping slowly out of a period of recession where financing was nearly impossible to get, providers, operators and developers are starting to look favorably at new development and refreshment of existing properties and infrastructure. Though capital is less than free flowing, money is entering back into the long-term care and seniors housing world fluidly enough that projects once parked in the “back of the lot” are edging closer to the front. Having watched significant failures occur over the past three to four years and/or counseled organizations through some of the rough times, now is an appropriate time to pass along some “learnings” from the failures and struggles that I have seen. Importantly, as the industry and the methods for financing have fundamentally and permanently changed, so have the markers for assuring project (new, redevelopment and remodeling) success.
As a primer or if you prefer place to start, there are three basic elements critical to project (new construction or renovation) success: Market demand, cash flow margins, and project cost. Too many new projects failed to meet occupancy projections simply by misunderstanding market demand dynamics (market demand is not demography). While not universal or sacred to only non-profits, misunderstanding regarding cash flow margins is a common failure item. For example, I don’t know how many projects I’ve looked at, especially on the substantial remodeling side, that incorporated no expectation of new revenue or improved operating margins (either this element was missed or worse, not present/expected as a result of the project). Finally, project cost should always be less a function of funds available but more a function of payback. I’ve seen too many projects that suffer from “scope creep” simply because funds, either via debt or equity, were available. Being able to afford something doesn’t necessarily make it “affordable”, especially when the long range economics of a project are critically analyzed.
Avoiding the common traps, pitfalls, etc. that lead to project failure or in some cases, poor performance, is a function of being clear and knowledgeable about the core feasibility requirements. Being clear up front means not just “knowing or providing lip-service to” but actually investigating and working through each element.
- Market Demand: The presence of age and income qualified individuals is not demand; it is supply. The supply of potential customers only assures that potentially, a large enough universe of people exists that meet the broadest elements of “potential consumers”. Recognition that only so many of this universe will be actual consumers of any long-term care or seniors housing product at a given time is critical to developing the initial framework for market demand. For example, less than 10% of all seniors reside at a nursing home at any given time, whether for short or long-term care purposes. If occupancy rates within the existing supply of facilities are average to low, building more units within such a market is a big step toward potential failure. Simply adding units, even if they are different in size, amenities, etc., doesn’t change the core demand for the product. Success of such a project in such a market is thus fundamentally hinged on “taking existing customers” from an established facility; a risky proposition at best. Even in markets with good demographics (customer supply) and minimal to average supplies of like products doesn’t guarantee that demand is present. This is particularly true for seniors housing where demand is very price elastic. The same is true, though not as directly, for SNFs when demand is correlated to payer source (e.g., a private-pay only facility in a market with primarily a Medicaid demand). Without factoring in price and overall costs plus location and unit features and benefits, demand cannot be truly gauged or determined. The mere presence of a suitable supply of age and income qualified individuals doesn’t guarantee any occupancy of a new project, save that the new project at a given price, given location, with given features and benefits fits an unfulfilled need or want within the universe (supply) of qualified customers. Summarily, no matter how much money someone has or how age appropriate someone is, if that person (or persons) does not possess or find a need for a given product at a given price with desired features and benefits, the mere presence of the product within the market will not promote consumption (or occupancy).
- Financial Feasibility: Interconnected with a fundamental understanding of demand is pricing. Pricing, as I have written before, has two key components. The first is the derivation of price based on the formula of Fixed Costs + Variable Costs + Margin = Price. The second component is strategic, tied to market. In any given market, the supply of like products and programs will dictate the amount of elasticity that exists across the pricing continuum. No longer is “me too”or matching the market a viable strategy for pricing. This said, true financial feasibility is mostly tied to the first pricing component. Where projects tend to struggle is when three core elements are misinterpreted or, over (or in some cases under) estimated. The first core element is fixed cost. Feasibility which doesn’t properly capture the key fixed cost elements of debt, debt repayment and depreciation has the potential for quickly turning a project from possible to impractical. Specifically, I recommend the following approach to structuring the fixed cost portion of the feasibility.
- Debt assumptions, especially those involving floating rate scenarios, need to be conservative and reflective of the true interest rate risk across as lengthy a horizon as possible. Fixed rate scenarios are ideal but terms for the fixed period are generally less than the amortization schedule for the debt.
- Following the point above, debt repayment on a schedule that is more aggressive than the amortization schedule is a must. New projects or substantial remodeling projects carry the mindset that depreciation is a non-event in the initial years; minimal cash outlays. While this may be true, depreciation picks-up rather quickly in terms of cash needs by year 5 and becomes more acute by year 10. By year 15, substantial repairs and upgrades to major elements are a common theme. Carrying debt across a normative amortization cycle without more aggressive repayment means that by year 10, the project is being substantially replaced by the need for upgrades and repairs, all while the first phase is still being paid for at a premium cost (interest on the original debt). I have seen all too often, providers struggle with competing cash needs; debt service vs. capital maintenance. Once maintenance becomes deferred, the ability to compete successfully is hampered. Cardinal rule here: Work the feasibility numbers in terms of pricing to include a debt repayment plan no longer than fifteen years, regardless of the amortization terms, and incorporate a laddered assumption of cash needed (reserves) to replace equipment, upgrade units, etc. within the fixed costs assumptions (cash funding depreciation).
- Margin is the devil in the details. Too much fixed cost and/or too much variable cost eats at needed margins or stresses occupancy assumptions to unrealistic and/or unsustainable levels. Ideally, a forty percent or higher “top line” margin is the target for Assisted Living and Independent Living (marginally higher for Independent). When debt and depreciation (cash funded) is added below the line at stabilized occupancy, the project can create sustainable cash earnings/returns on equity. Lower leverage (debt) levels and lower interest costs can aid in thinning top line margin levels but remember, equity contributions instead of debt still bear a cost in the form of opportunity cost. Repayment of equity infusions need to be factored with an opportunity cost (interest factor). Depending on current interest rate environments, the arbitrage on equity cash can be positive (debt cost is higher) or negative (debt cost is lower). Not always does the provider get to pick the amount of equity participation required as lenders today are far pickier on leverage levels and loan to value relationships.
- Project Costs: Project costs should always be built around the assumption of revenue required to substantiate the project. Renovations that do not incorporate opportunities for new revenue or enhanced revenue (new product/service lines, better payer mix, etc.) will almost exclusively be paid-back through depreciation funding and life cycle cost assumptions. In short, no new money, the project scope needs to be tight. Rarely have I ever seen the purported “efficiencies” used in renovation justifications materialize to the extent that the gains justified the project scope. I also am always wary of renovations that incorporate enhanced or improved occupancy levels. Again, rarely does the cost justify the outcome and almost always, the adage of “we are not marketable” is more a function of other organizational issues (bad reputation, pricing, average care, etc.) than it is a justification for an expensive renovation project. In new projects/new development, building efficiency is the key to adequate payback. Allocating too much space to common areas and non-revenue producing areas increases project costs in terms of building and furnishing (not to mention heating, air conditioning, maintenance, upkeep, etc.) and places more “dead space cost” burden into the pricing equation. Objectively, a building that maximizes the majority of square footage for revenue production pays back investment far faster. In an Assisted Living project or Independent Living project, I think a 65% revenue allocation vs. 35% common allocation is reasonable. Higher allocations to common space strain pricing and definitely, require higher occupancy levels to create break-even and payback targets. Similarly, more common space consumes more “furnishings”, often minimally used. Good focal space done right and space with a multi-purpose use is preferrable over space with singular use or no real defined use at all (i.e., lounge
Presentation on Strategic Pricing for Senior Housing
I’ve posted a Power Point presentation one of my partners and I did at a trade show/conference last week. The title is “Strategic Pricing Strategies for Senior Housing” and it is available for viewing or download on the Reports and Other Documents page of the site (menu listing on the right).
Hospices Looking for Census Improvements: Add Some Innovations
Most hospices I talk with are finding census gains difficult these days. As I’ve written before, a number of factors are conspiring at the moment to keep census somewhat depressed and referrals tough to come by.
- With a struggling economy, all providers are looking for paying patient days. Referrals that should (or would) routinely go to hospice aren’t as readily available as upstream referral sources (hospitals, skilled facilities, etc.) don’t have the depth of other paying patient pools. In fact, all downstream providers are seeing compressed referrals. Simply put: When the queue of paying patients is smaller due to a fall-off of privately insured patients (due primarily to high unemployment), any paying patient including those that would be or should be hospice referred is better than a vacant bed. There simply are not enough patients with good payment sources for all of the supply of providers today.
- Hospice is a mature market or one that is stable and growing only very modestly. Despite the fact that it is cost-effective, arguably more appropriate and better for a terminal or near-terminal patient, it hasn’t permeated the traditional patient, familial and medical community psyche to a sufficient depth to create additional demand. Culturally, the medical community and patients still prefer to pursue curative options at virtually every step of the way as opposed to accepting death as a natural course of occurence.
- The financial incentives favor the pursuit of more expensive care as opposed to hospice. Payment in our system is highest and most fluid for acute, episodic, technologically based care and treatment. A simple economic axiom applies: What gets rewarded gets done (or, follow the money).
Taking the above into account, one would tend to think that generating additional referrals is an improbable task. While I won’t propose that doing so is easy, there are some options in terms of “innovation” that make sense. By innovation I mean programmatic changes or new programs that tap non-traditional markets or fractional markets. Being honest, simply marketing more or trying desperately to educate a few more patients and/or a few more physicians about the benefits of hospice care won’t create many additional referrals (again, see the top bullets for “why”).
Here are some favorites that I have seen tested in other settings, some within hospice programs, and/or other countries. Each is innovative and worthy of exploration by a hospice organization that is looking to create some novel niches, incremental referrals and brand differentiation.
- Day Hospice: A variation on adult-day care, this program provides a respite style of program but for caregivers to take a few hour break. Transportation, meals, socialization, etc. plus spiritual and other counseling typically round-out the services and where “cares” are involved, staff assist the patient as required. A hospice could start such a program either via a partnership with an existing adult day care provider, SNF, Assisted Living, Hospital or on its own in a suitable location.
- Disease Specific Programs: Develop end-of-life algorithms and care management programs for specific diseases such as ALS, MS, Parkinson’s, COPD, etc. Enlist physician specialists to provide review and consultation in the program development phase and even in a supporting medical director capacity. Consult with the local chapters of groups/associations that represent each disease (Parkinson’s Association, MS, etc.). The result of this approach is a three-fold win for the hospice. First, a segregated category of potential new patients. Second, a branding opportunity and co-marketing strategy through the physician specialists and the local disease representatives. Third, a focused opportunity to educate patients and physicians on when, why and how to make a hospice referral – these folks become a “warm” group.
- Embrace Alternative Therapies: Some organizations do this better than others but few do the compendium and certainly not as well as organizations in foreign countries (the Dutch are the best). Here’s a few of the better concepts that I have run across.
- Medicinal Marijuana: Now legal in 14 states and DC, medical marijuana is viewed as a wonder drug for symptom management, especially by cancer patients and patients with intolerable spasms (MS, Parkinson’s, etc.). Embracing this option where legal and perhaps, even becoming a distributor creates a “cutting-edge” brand and a marketing advantage.
- Acupuncture: For use either as a stand-alone symptom management aid or for adjunct therapy to deal with pain, nausea, spasms, headaches, etc. Bringing on staff, a certified acupuncturist is again, a cutting-edge option and one that is marketable.
- Mood Rooms: For inpatient programs, rooms developed with particular design elements have proven to be successful in easing patient’s symptoms and creating a more relaxed and tranquil environment. Hospitals have started to embrace this level of design and there is no reason that hospices don’t do the same. Everything from lighting to color to sound systems and views are designed to improve tranquility, comfort, and patient “mood”.
- Others: Massage therapy, music therapy, hydrotherapy, meditation, etc., are all fair game and in one form of another, have legitimate bases for use in a hospice setting.
- Increase the Technical Capabilities: Being more capable in terms of taking certain types of complex patients is always a cost-benefit issue although, done correctly, the return is still positive “financially”. Patients that often don’t benefit from hospice (due to cost issues) include ventilator patients, patients that require palliative radiation or palliative chemo-therapy, and patients that require specialty DME. In reality, the scope of each under a terminal diagnosis is limited and with solid advanced planning. good partnerships with other providers, and effective cost management, it is possible to tackle these patients and still achieve a modest margin. Don’t be automatically afraid or unwilling to accept patients in unusual circumstances and actually, increase your technical competence in dealing with these patients. They are an untapped market in many regards.
- Private Duty: For a hospice that is part of a home-care organization and/or can partner with such an entity, private duty hospice can be very profitable and very successful, albeit on a limited scale and honestly, only in certain market areas. There remains a class of people that are terminally ill, hospice eligible and in-need (and desirous) of extended caregiver or private-duty support at home. Targeting this market is as easy as developing good relationships with trust company officers, estate planning attorneys, and other trusted counselors to the “well-off”. One word of caution persists, however. This group is picky so to sustain the business, a hospice must be very customer service focused.
- Be Palliative, Not Just Hospice: For those hospices affiliated with home care agencies or, can build a relationship with a non-competing agency, offering expertise to patients that require symptom management and palliative services only makes sense, even if the same patients aren’t yet hospice appropriate or won’t at this point, consciously elect a hospice benefit. Expertise in symptom management and the palliation of chronic diseases is the strength (or should be) of all hospices and leveraging this strength to “marginal” hospice patients builds a bridge for the hopefully, inevitable referral. If nothing else, this business is incremental revenue.
As I indicated, the above is just a sample of my favorites from sources where successes have occurred. I encourage readers to add others, different ideas or to elaborate on perhaps, a twist or two to the above. Feel free to post your comments and experiences so that I (and you) can share our “collective” knowledge.
As the Home Health and Hospice World Turns: Part II
In Part I, I wrote about my last week’s conversations, etc. regarding the home health industry, specifically Amedysis, the Senate Finance Committee inquiry, the industry impact via the PPACA and the likely consolidation and merger trends that are approaching. Suffice to say, not all of last week’s news and conversations focused on the home health industry as over the last thirty days, much has happened in the hospice industry as well. The difference between the two industries is that in hospice, the major news involved a significant merger and in home health, the major news involved the legal and compliance issues of the largest provider entity – Amedysis.
The hospice industry saw, via the merger between Gentiva and Odyssey, the creation of the largest home hospice company in the industry. Gentiva, while also a provider of home health, clearly chose to direct more of its attention to the hospice industry, moving from a moderate player in the industry to the predominant player via the acquisition of Odyssey. Odyssey, while not as large as Vitas (the former largest hospice provider), held substantial market share and presence and in many regions and distinct market areas, competed head to head with Vitas for patients. For more information on the Gentiva/Odyssey transaction, see a related article in my company’s E-Newsletter at http://wp.me/pD9Ac-4Q .
Analyzing this merger leads me to a series of assumptions about where the hospice industry is at present and where it is likely headed.
- Hospice is now clearly a mature market or in other words, a market that is unlikely to grow significantly over the near to intermediate term horizon. Despite a fairly profound demographic shift occurring over the next twenty to thirty years (the maturation of the baby-boomers), there is no real indication even with this influx of older adults, that hospice as model of care, will gain in referral popularity. While seniors utilize hospice more in total numbers than any other age cohort, as a percentage of the total cohort, utilization trends show little forward growth. There are a number of reasons why;
- Culturally, U.S. medicine and the U.S. population still values the process of cure or health restoration far greater than the concept of natural death. As hospice is a downstream referral (the referral comes typically from non-palliative medicine trained physicians or via hospitals and/or long-term care providers), the hospice industry relies on the referral source to be; a) knowledgeable about the value of hospice and how it works for patients and their families, b) willing to forego potential incremental revenue for continued care by making the referral to a hospice, c) willing to engage the patient and the family in a difficult conversation regarding end-of-life and treatment futility. As long as these dynamics remain in place to the extent they presently are, the growth of utilization will remain fairly stagnant.
- Financially, the incentives for referrals to hospice don’t truly exist within the current U.S. system. There are no barriers in-place to reduce the reward (payment) for continued acute, diagnostic or curative care (choose your own verbiage) and as a matter of fact, the reimbursement systems (private and public) pay incrementally more for more intense care than palliative care, even if arguably, the care is futile. As only patients and their respective treating health professionals can conclude that continued curative care is futile or unreasonable, the process of garnering more money for more treatment remains intact as a perverse incentive.
- While not for hospice people or physicians trained in palliative medicine, terminality remains an uncomfortable and even disputed condition for many physicians. Patients and there families still wish to avoid discussions far too long and in some cases, avoid the discussion altogether. While in-roads are perhaps being made in some medical centers and in certain communities, these in-roads are miniscule and not evident of a ground-swell movement toward open discussions regarding end-of-life decisions.
- As with the home health industry, the movement in Washington is toward curtailing the growth of hospice spending. The prevailing feeling in Washington policy arenas, supported by Medpac, is that the hospice reimbursement under Medicare is too generous and the benefit itself, easily manipulated and poorly defined. While the PPACA did little to negatively impact the hospice benefit or payment, the recommendations directed to the Secretary of HHS in the language intones significant changes forthcoming.
- Reimbursement under Medicare will change such that early days in the initial benefit period will be paid more as will days at the end of the patient’s stay (proximal to death). Days during the interim, longer stays will be reimbursed with lower payments. The point here is supposedly a recognition that patients with long stays have periods of stability necessitating far less care from the hospice.
- More emphasis will be placed on denying stays for non-specific terminal conditions or denying portions of stays. CMS has determined that too many longer stays are related to diagnoses such as terminal dementia, failure to thrive, etc. In order for these stays to be covered, the onus will fall on the hospice to provide very detailed documentation supporting patient decline.
- More emphasis will be placed on physicians to document terminal conditions and to prognosticate length of likely survival, especially at recertification periods. More direct “hands-on” involvement of physicians will also be required (physically seeing the patient).
- Certain types of stays and relationships between hospices and nursing homes will be closely monitored and reviewed. CMS and Medpac have determined that hospice stays in nursing home environments on behalf of nursing home patients are considerably longer and possibly in many cases, in violation (the hospice) of the conditions of participation as hospices utilize nursing home residents as sources of revenue but often, fail to meet the care requirements (using the nursing home as the source of care and service) under the hospice federal code. Additionally, CMS and Medpac have placed the target for reform squarely on the large for-profit hospices such as Vitas, Gentiva and Odyssey which have typically used nursing homes as major sources of referrals for hospice patients.
- The PPACA, while not bending the cost curve or reducing the overall level of national expenditures on health care, does change in the interim, the overall health care economy. Providers are re-positioning and re-grouping to combat what they perceive, and in some cases know, will be negative changes to how they presently do business. Providers which rely heaviest on Medicare as the bulk of their overall revenues will move the fastest and the most aggressively to alter their current business practices, knowing that regardless of the overall status of the PPACA (repeal, restore Medicare cuts, etc.), the health care economy is entering a long period of fiscal constraint – payments will never be as high or as fluid as they once were.
- Because of points 1, 2 and 3 above, the industry will head into a period of consolidation and even, contraction. The Gentiva/Odyssey merger is a signal of the maturity of the industry and the trend toward tighter regulation of hospice stays under Medicare (the bulk of the hospice revenue) and less economic value per each stay. Lower future revenues per stay, either via reimbursement cuts or regulatory constraints placed on the length of stay, means more overall stays are required to equal the same or greater revenues going forward. As the growth curve of new “potential” referrals is flat, the only real source of new business or referrals for a provider is acquisition of existing market share (buying someone else’s referrals). In order to maximize profitability in an environment where the market is mature and the total revenue per each case is flat to shrinking, providers will have to adopt one of the three strategies below.
- Acquire other providers to build more referrals or volume. While each patient stay will be economically less valuable, increasing the total number for a provider while maintaining expenses on a ratio basis, lower than revenue, will provide a method to achieving overall net income targets - critical for publicly traded provider organizations.
- Shrink the organization to fit the new revenue and length of stay realities that are in place and forthcoming. An organization that can right-size its operations to fit the new business paradigm will be smaller but potentially equally or perhaps, more profitable. The risk here is that provider organizations that are acquiring market share may marginalize some markets such that a shrinking provider (by choice) loses desirable market share.
- Expand non-Medicare business and add complementary businesses that may provide incrementally equal or more revenue than that which is lost under Medicare. Arguably, this strategy may only work for regional or single market providers and those that have strong system ties (hospital owned, etc.).
One final point to note concerns the economy. Absent from the above factors I laid out influencing the hospice industry is the stagnant economy. With recovery a daily discussion regarding likelihood and timing, current uncertainties persist that impact hospice providers rather dramatically.
- The overall number of paying patients available to all providers within the health care economy has shrunk in recent years. This shrinkage is primarily due to job losses and benefit losses. Until employment rebounds and jobs with benefits become more plentiful, consumers for health care in the form of paying patients will remain down.
- When fewer paying patients are in the queue, those patients that do have a payer source, even a less than optimal government payer source, are prized commodities. Each provider wants a piece of the same paying patient.
- Hospice is as I pointed out, a downstream referral. When the upstream referral source, principally hospitals, lacks sufficient paying patients in the queue to replace current patients it “may” customarily refer downstream, it holds the paying patient longer, either delaying the referral and the portion of revenue that comes with a longer stay or avoiding the referral all-together. Similarly, all downstream referral sources such as nursing homes compete aggressively for the referrals even though a referral of a terminal patient (or potentially terminal patient) is ordinarily, not a prize catch for most nursing homes. This competition erodes the number of total possible referrals available to a hospice.
- Each patient has an economic value to a provider. When a patient with a higher economic value (a better payer source) are lacking, providers sort down to the next patient level. This sorting process occurs as a result of too few patients with payment sources available to match the supply or capacity within the existing provider universe. Some markets hit hardest by the downturn will evidence this reality in greater depth and unfortunately, with greater persistency. For hospices (and all downstream providers) in these heaviest hit markets, referrals have trended down and will stay down until the supply of patients with payment sources increases and specifically, the supply of patients with better payment sources and today, deferred health care needs (e.g., elective surgeries such as joint replacements, etc.).
As the Home Health and Hospice World Turns: Part I
Sorry for borrowing (piece of) a soap opera title for this post but it is rather appropriate given the news that occurred over the past 30 days. Just this past week, I’ve been interviewed by two business newspapers and on the phone with an investment banking firm I consult with from time to time regarding Amedysis, Gentiva and Odyssey’s merger, the pending impacts of the PPACA on the home health and hospice industry, mergers in the industry in general and using a “catch-all”, what the “heck” is going on in the home health and hospice sectors. With a chance to recoup over the long 4th of July weekend (and organize my notes from last week’s conversations), a post on what all the conversations were about seemed appropriate.
Amedysis: A month ago, on my company’s E-News site (http://apexhealthcareconsultants.info), I edited an article regarding the Senate Finance Committee’s inquiry into the Medicare billing practices of a handful of very large home health agencies (Amedysis, Gentiva, LHC Group etc.). The inquiry is a result of an article that appeared earlier in the year in the Wall Street Journal, focused quite intently on Amedysis’ billing practices; principally as applicable to therapy visits. The fall-out since the Wall Street Journal article and the Senate Finance Committee article is two-fold. First, the class action suit (I’ll touch on it in a bit) and the hefty drop in Amedysis stock price.
In brief, the class-action suits (there are three) focus primarily on the perspective of shareholders (the “class”) and alleges that the questionable Medicare billing practices (none of which at this point, CMS or the OIG has taken specific issue with) served to artificially increase the share price of Amedysis stock. The allegation of abuse of the Medicare system, prior to any action taken by the federal regulatory system in the form of a fraudulent billing investigation or claims investigation, is a bit different in-so-much that it essentially accuses the company of manipulating its earnings as opposed to causing harm to any patients or group (class) of patients. The “harm” for shareholders is the drop in price that would/did occur as a result of the alleged fraudulent billing practices. To add a twist, the suits also allege Sarbanes-Oxley violations which require the corporate officers of publicly traded companies to abide by a code of ethics. Amedysis settled an allegation of fraudulent Medicare billing practices in 2003 (for Medicare activity between 1994 and 1999) and as part of the settlement, expanded its corporate compliance activity/program. Additionally, since 2003, Amedysis has had notable turnover of the key financial executives (CFOs primarily) with active rumor-mill chatter focusing on the cause related to overly-aggressive Medicare billing practices. Medicare represents 87% of Amedysis annual revenues, by far the largest percentage for any home health provider in the industry.
As Paul Harvey (famous radio newsman now deceased) was famous for; “Now, for the rest of the story”. There are a number of different and integral factors in play that are unique to Amedysis but also, symptoms of an industry, a payment system and a flawed health care reform law.
- The issues regarding possible Medicare over-billing or at least, aggressive billing are not new for Amedysis. Their growth has been remarkable and unique for an agency so fully immersed in a government revenue stream. What is unique at this point in time is that the Senate Finance Committee inquiry, Wall Street Journal article and now the class-action suits come in advance of any customary federal regulatory actions. I do suspect that CMS and the OIG will enter the fray in the near future.
- Medpac has reported to Congress repeatedly that the Medicare payments to home health agencies were “lavish”, producing double digit profit margins on average, for most Medicare home health encounters. The PPACA (reform law) effectively cut Medicare payments to home health agencies and increased the documentation requirements for agencies to justify the necessity of continued visits.
- The feds have aggressively stepped-up their search via Recovery Audits and targeted billing inquiries for Medicare over-payments or more appropriate, Medicare fraud activity. This activity is two years old and growing each year with additional force. The writing is/was “on the wall”.
- To fully understand “what” is at the core of the Amedysis issue is to understand the age-old economic axiom that states, “what gets paid for (rewarded) gets done”. Medicare provided a utilization incentive tied to a certain number of therapy visits ($2,200 for 10 visits). Agencies thus targeted patients and developed care practices that maximized the opportunity to garner the incentive payments. In a typical government move, CMS rescinded the incentive payment as it became obvious that agencies were “gobbling-up” the requisite visits and conforming patients to achieve the incentive. A more meager incentive of a few hundred dollars is now provided at six visits, fourteen visits and twenty visits. Oddly enough, companies today seem to provide far more “six visit” encounters than twenty visit encounters (profitability vs. cost for twenty visits as well as a likely evident decline in medical necessity by the twentieth visit). Amedysis of course, is not alone in seeking to tie care provided to reimbursement nor is the home health industry alone in gaming the Medicare reimbursement system for additional dollars. For-profit hospitals, nursing homes and hospice agencies (and non-profits) alike are skilled at “Medicare maximization”, effectively matching what Medicare will pay with certain types of referrals, matched against the costs incurred to care for certain types of patients. This game goes on year-in and year-out with CMS constantly tweaking PPS categories to incent providers to take certain patient types (payment was too low) and to reduce the profitability of other patient types. In short, what gets paid for gets done.
- The PPACA did nothing to reform the system and arguably, it made it worse by attempting to extract funds via reimbursement cuts from Medicare. Of course, it is unlikely these cuts will be fully made or sustained as Congress has never shown the political will required to cut provider payments. By not truly reforming how Medicare reimburses providers for care, the PPACA only served to layer on huge amounts of bureaucracy to an already antiquated reimbursement system. In the end, nothing changed in terms of how Part A and Part B of Medicare pays providers; only the amounts “theoretically” changed. As a system, Medicare pays more for more care and higher acuity care. Providers will naturally gravitate their referral gathering efforts and marshall their care delivery systems toward the patient encounters that create the most “spread” (cost vs. payment). As the overall universe of these “profitable” patients is somewhat fixed, the provider universe is forced to unnaturally stretch the definitional boundaries of patient types (upcoding in plain health care vernacular). In other words, there are not enough truly “organically” existing patients that fit the best (most profitable) reimbursement categories but there enough that are perhaps, at the fringes. Add the fringe patients with a bit of creative tweaking via assessment and documentation to those that organically exist (fit the exact patient type) and presto, sufficient current volume for all providers. The difficulty for regulators and others who would charge that the fringe patients are not truly members of the organic group (those whose care requirements exactly match a certain reimbursement category or categories) is “proof”. The provider and medical communities are far better versed in assessment techniques and documentation requirements and as such, little can be done to reign in this reimbursement “three-card Monty” game. Until the reimbursement is reformed to reward better, more appropriate and efficient care versus “more” care, the over-reimbursement problem will remain, as it has for decades dating back to when providers ballooned certain costs to receive higher per diem rates from Medicare (under the cost-based reimbursement system).
What comes next in this paradigmatic shift in the home health world is merger/consolidation. As the profitability of one element of Medicare business shifts, larger agencies will acquire smaller to medium-sized agencies in order to increase market-share, lever infrastructure, and to supplement lost incremental margins with volume. Simply put, if the relative margin for one type of encounter shrinks, recouping that lost margin (or at the least the majority of it) becomes a function of incurring more encounters with smaller margins. As long as the incremental costs of additional capacity to handle greater volume remains in a ratio, lower than the net revenue received from the greater number of “less profitable” encounters, it is possible to generate a similar level of organization-wide, net operating income. The fastest and arguably most efficient way to create incrementally more encounters is to acquire someone else’s encounters at a price-point that is sufficiently low enough to create virtually (virtually to mean within a short time-frame) instant margin via the increased volume/market-share.
In effect, smaller agencies with less volume to spread the reimbursement loss/risk become attractive targets in this environment. A smaller agency’s value drops as its revenue/margins shrink and with limited geographic presence and referral markets to spread the lost revenue risk across, the entity price declines. The decline in entity price is attractive for a large acquirer seeking solely market share and/or incremental volume. In short, the acquirer is capable of paying less for the economic value of the entity (it has declined or will declined) which it really doesn’t want, save the referral market or incremental patient volume which it desires. The value is purely found in the market share or referral base, not in the economic metrics or financial value of the entity. For a larger provider, acquiring smaller agencies within areas that the larger provider presently doesn’t serve or undeserves is the goal. The “merger” is almost protectionist; protecting profit margins or revenue streams that are shrinking by increasing volume and thus (hopefully), more overall revenue, equalizing the lost revenue once gained per encounter during periods of higher reimbursement.
In the next post, Part II, I’ll review what is going on in the hospice industry and why the Gentiva/Odyssey transaction is significant in terms of a harbinger of activity yet to come.
Senior Living/Housing M&A and Fitch
The title of this post likely appears a tad bifurcated but as you read through it, the title should make a bit more sense. In the past two weeks, I’ve had numerous conversations with potential buyer’s looking at or for (to acquire), senior housing projects (AL, IL, some CCRC and a few SNFs). Invariably, the conversations center around the current prevailing notion that “now” is a good time to buy. The most salient reasons I hear to support this belief are “values” are plentiful and capital is coming back to the industry. Alas, I guess it is my job to be the bearer of “bad news” or, not really bad news but “truth”. This is where the Fitch part of the title comes into play.
Fitch, the ratings agency, released its industry outlook for Senior Housing in mid-March and as suspected by most, the outlook remains negative. This said, it should be noted that Fitch does somewhat confirm the belief that capital is returning, albeit slowly to the sector, and that the industry as a whole has “shown suprising resiliency”. Still, as detailed within the report, 2010 contains (likely) more negative or static news for the industry than positive or encouraging news. Principal to Fitch’s outlook is its prognostication on ratings of debt issues (new and existing) and in this case, Fitch is predicting that the majority of rating decisions will be affirmations of existing ratings and when changes to ratings occur, Fitch is predicting more downgrades than upgrades. For Fitch, the ratings outlook plus the overall sector economic outlook and trend is the basis for their sector outlook.
Overall, the report presents a great deal of carry-over of issues from 2009, namely the taint in the industry left over from the Erickson collapse. Per Fitch, little has changed across the industry dynamic that caused Erickson to melt-down. In specifics, their conclusions are;
- Current economic recovery laxity and a slow and very limited recovery in the real estate sector will continue to hurt the industry.
- Letter of Credit repricing risk in the next 12-24 months is high as current Letter’s of Credit renewal, banks that previously extended credit either may pull away entirely or provide renewals at significantly higher prices. Today, the going rate trend for renewals is running at 50 to 200% higher for investment grade debt (BBB or better).
- Weaker liquidity levels for the industry will continue throughout 2010. Since 2008, liquidity levels have dropped in the key measures of days cash on hand (down by nearly 75 days), the cushion ratio (down by nearly a full point) and cash to debt (down by 10%). The concern as expressed by Fitch is for continued slow economic recovery or the potential of an additional market downturn, shocking liquidity again.
- Cost of capital continues to run higher than periods prior to the economic downturn. This is particularly true for non-rated debt and floating-rate debt and less so across a broader horizon for fixed rate debt. In reality, fixed-rate debt today is priced attractively, considering the cost of variable-rate debt and LOC (Letter of Credit) fees.
- The real estate recovery is barely, if at all visible, and for Fitch, this trend foretells occupancy fortunes for the sector. The biggest impact on occupancy remains for new projects or projects with recent sizeable expansions. Occupancy in general is down by 3 to 5% and for established providers, the trend has remained stable to marginally improving.
So the Fitch tie-in in the title? What is known by Fitch is known by lenders and the capital markets and thus is known by investors. In reality, a willing buyer and a willing seller today is only 50% of the deal; the other half is capital – unless the buyer is in an all-cash position. I’ll elaborate a tad more at the end.
As I indicated earlier, my job is to be the bearer of the truth when I talk with buyers or interested acquirers. The truth regarding the M&A scene today for senior housing is that the real value plays are projects that are small or distressed and those are virtually impossible to finance (notice I said “virtually”). When and where financing can be obtained, if needed, for these distressed or smaller projects, the terms are stiff (rates, covenants, term, overall costs). Where buyers are assuming more discounts should be available, sellers are not cooperating. In short, there is a pretty solid gap between a seller’s valuation and a buyer’s valuation of the same project or group of projects. Sometimes, this gap can be overcome but most often, for solid projects with decent cash flow, it cannot. Sellers today have precious little incentive to reach down to buyers, especially if their project (single or portfolio) is stabilized, cash-flowing, and has a solid balance sheet (average or better than industry average capital and liquidity ratios).
Another complication for buyers is the lack of decent comparable transaction data over the past two years, especially in certain areas or regions. Comparables drive valuations/appraisals and of course, valuations/appraisals drive lending terms and limits. I have seen a pretty decent disconnect between deal terms and valuation results over the past two years and in a large part, due to a lack of decent, reasonable and recent comps. Lenders, skittish as they are about the sector, are highly wary of comps from deals completed three or four years ago when the market was frankly, a tad over-heated and the economy, over-bloated. Summary: Throw out the comps that may have made sense on a representative basis three to four years ago and try to find representative comps that are from a period of market stagnation and recession – the alchemy for a valuation disconnect.
For buyers, the reality is that the market is still seller-driven and I don’t see a dramatic change occurring throughout 2010. Perhaps the most investment-ripe play is in the SNF sector as volumes are slightly up, bed prices are slightly up (albeit fractionally compared to a double-digit decline from 2008). In 2009, AL prices per unit continued to decline (30% aggregate since 2008). Note: The price suppression is a reflection again on the weakness of the housing market plus the deals completed comprised primarily of weaker projects. What the SNF sector offers today is “known” external variables and a disconnect from the real estate market. With health care reform complete, the SNF sector is essentially “stable” for investment. What this means is that revenues are easier to forecast and operating ratios quicker to analyze. The prospects in other words, of a transaction are more tangible and easier to quantify. This said, I still don’t see a ramp-up of activity, more perhaps a gradual increase with modestly rising or stable per bed prices and effectively, stable cap rates.
The AL and IL sectors will still remain a bit problematic for buyers unwilling to put a fair amount of cash into a deal or unwilling to use enough cash to create a financeable transaction for a distressed project. Value buyers are going to continue to find that sound projects are few and far between on a true value play and the stickiest issues regarding valuations and financing will remain.
The conclusions I draw and the counsel I provide today is rooted in basic economics (my history).
- Buyers and sellers exist across the entire price/value continuum. At times, the proportion of one versus the other (sellers vs. buyers) creates different strength/weakness propositions hence when a market becomes a buyer’s or a seller’s market. Most often, historically, the market is neutral. There is not enough volume today to characterize the market as predominantly strong for either side (buy or sell) but the dynamics are such that sellers with good projects have an upper-hand for the time being.
- The near term trend also favors sellers, especially as buyers begin to gain access to reasonable cost capital. Initial cycles where capital becomes cheaper or easier to access favor sellers as buyers typically will use the new-found access to buy at price points recently considered by them as too high.
- The intermediate term will favor buyers as the market seeks to return to “neutral”. Sellers, seeing deals done at increasing prices and with increasing volumes, will shift their positions from hold to sell, trying to reap a piece of the action. Too many sellers will enter the market and buyer’s will be favored.
- The credit markets will continue to gradually loosen but again, cautions regarding valuations need heed. Buyers with solid credit, cash to add equity and sound balance sheets will find fixed rate deals more and more attractive. New bond deals will also find fixed rate deals almost as attractive if not as attractive as floating rates with LOC enhancement, given the rising prices of LOCs.
- As a rule, properties that are stabilized are likely at or just beyond their low census point. I think occupancies will or have stabilized and start to trend back-up, although the slow to non-recovering real estate market will keep progress gradual. Some markets will fare better than others. I also see these same properties in a better overall position financially in 2010 than last year or the year before. Providers have done a decent job getting “lean”, save perhaps their debt load. The good news is that rates are not under pressure to rise so even potential increased LOC costs (as applicable) won’t alter too many balance sheets among the stabilized provider group.
Health Care Reform and Assisted Living
In a bit of an indirect manner, Assisted Living got a boost from health care reform, albeit in a typical governmental fashion. With the Feds willing to use Medicaid as the vehicle for expanded coverage programs for underinsured (those within 150% of the poverty limit with high-deductible plans) and the uninsured, coupled with additional funding for Home and Community Based Services, an expanded source of potential residents for AL providers comes forth. Of course, this new source of residents is not wholly unfamiliar to some providers and as the providers already working within Medicaid waiver programs will attest, not without problems.
Over the past decade, the movement to deinstitutionalize certain at-risk seniors and the chronically disabled has continued to gain momentum initially at the state level, then through the federal level. The first concerted efforts back in the late eighties and early nineties focused on moving the developmentally disabled and mentally ill from institutional settings to community based settings, typically group homes and residential facilities. The dominant majority of this group was (and remains) Medicaid eligible and thus, the shift from an institutional focus for care to a community-based focus tied directly to savings for Medicaid. Without question, tangible benefits in terms of quality of life were also achieved for the resident population.
Fast-forward through the nineties and up to 2009, the transitional movement of deinstitutionalization gained momentum. The focus continued to be on Medicaid eligible individuals and dual-eligible individuals (Medicaid and Medicare) with moderate to minimal care needs placing them “at risk” of institutionalization (generally SNFs or Intermediate Care Facilities). The “at risk” element wasn’t related to their care needs but to the benefit structure of Medicaid which without permissive changes made by the applicable state and the federal government, could only pay for care delivered in a federally certified care center (SNF or ICF). As the Feds became more open to allowing states to “waive” the core requirements for benefit and service eligibility contained within state plans and still receive FMAP (Federal Medicaid matching dollars), the migration of seniors from institutional care to community-based options (principally Assisted Living) picked-up pace. During this period, the popularity of Medicaid waiver programs increased as more Assisted Living providers became willing to accept this source of residents, states enjoyed the benefit of reduced institutional care utilization (a savings) and various advocacy groups touted the quality of life improvements afforded to seniors living in residential care environments as opposed to nursing homes/institutional care centers.
Looking reflectively however, illustrates that this transitional period and the gain in popularity of Medicaid waiver and home and community based care options wasn’t without a series of problems. First, states were often ill-equipped to care manage the targeted group of seniors. As a result, systems for access, payment and ongoing certification of eligibility were often fragmented and ineffective. Second, states and the Feds, under-estimated the demand for residential care. Third, costs associated with these programs soared and providers, while still phasing in to accepting Medicaid waiver residents, encountered (in some cases) rate cuts, mounting paperwork, slow payments and in some cases, no payment. Other problems also occurred such as access issues in various communities (insufficient services to meet the demand), spousal impoverishment qualifications under Medicaid that the Feds had not addressed, and insufficient additional federal funding to grow the waiver programs to meet the rising demand.
Understandably, the Federal government during the creation of health care reform legislation, sought to address some of the more pressing issues that the states encounter within Medicaid waiver programs and in delivering an expanded array of home and community based care options. The result of the recent passage of the Patient Protection and Affordable Care Act is that to a reasonable extent, the issues noted above were addressed. Like all major Federal social policy initiatives, the legislation also has flaws. The benefit potential for Assisted Living providers and home health providers is fairly plain; at least for those provider groups that wish to continue to care for Medicaid waiver residents and/or are targeting an increase in their existing programs. There are also potential opportunities for new service and care programs integrated within senior housing and affordable senior housing projects. Below is a summary of the “pluses” I pulled from the legislation.
- Community First Choice: Allows states to cover the cost of attendant (non-skilled, non-CNA) services for a Medicaid beneficiary if doing so would prevent the individual from being hospitalized or residing in a nursing home.
- Allow states to cover more home and community based services via a plan (state Medicaid) amendment as opposed to a waiver.
- Extends the Money Follows the Person demonstration under Medicaid until 2016 (pays for more home and community based and residential services as needed by the individual rather than a payment targeted toward a specific provider care level such as SNF).
- As of 2014, requires states to provide the same spousal impoverishment protection to a spouses receiving home and community based services (no longer limited only to SNF residents).
- Provides an increased federal match to states that presently spend less than 50% of their Medicaid budget on non-institutional care alternatives provided the states submit plans to rebalance their Medicaid spending, increasing the resources provided to non-institutional care.
- Eliminates the cost-share under Medicare D for dual eligible individuals receiving home and community based services (dual eligibles in a nursing home are already exempt from the cost share).
- Funds the extended Medicaid match (FMAP) that was created under the ARRA (Stimulus Bill). Beginning in 2014 and through 2016, provides 100% federal funding for additional Medicaid costs incurred as a result of expanded Medicaid coverage provisions for lower-income individuals
As I indicated earlier, the legislation does have its share of flaws or imperfections. Below are some of the obvious issues.
- Creation of the CLASS Program (Community Living Assistance Services and Support) which is touted as a voluntary form of taxpayer-funded long-term care insurance that provides payments to individuals to pay for necessary home and community based support and care upon evidence of a disability or disabilities. Unlike traditional long-term care insurance plans, CLASS would cover a very broad array of formal and informal assistance, even on a non-licensed basis. Benefit amounts are self-selected upon enrollment ranging from $50 to $100 per day. The problems with CLASS are many including the fact that upon enrollment, an individual must pay into the program for five years prior to receiving any benefit. Second, the benefit levels are rather paltry, especially at the $50 per day level. Finally, and very unreported within the analysis of the reform bill to date, the premium levels are likely too low for the levels of benefits. In other words, CLASS is actuarially, out of the gate, underfunded and necessarily, premiums will rise. In fact, CMS estimates that premiums, once utilization begins to steadily occur and enrollment levels-off, could rise as high as $180 per month. Since it is in fact, a voluntary plan, it is likely that few will enroll and among those that do enroll, they are likely to already have some level of existing disability or a trend toward early disability - a problem of adverse selection. CMS predicts that the CLASS participants will use benefits at an “exceedingly higher” level than a typical individual purchasing a long-term disability or long-term care plan.
- The legislation maintains the existing Medicaid funding system which already is a convoluted and an economically unsustainable mess. In as much as the Feds are ponying up some additional money and relaxing the bureaucracy on states to expand their Medicaid plans to offer more home and community based care support and options, they are doing so within the same idiotic paradigm that presently has state Medicaid budgets swimming in red ink. In other words, the Fed’s money comes only after states commit to spending and thus funding, the expanded services. Garnering additional FMAP is akin to getting five Big Macs after buying the first one, then being required to continue to buy the additional five to keep the match coming, etc. On the back-end of course, having gorged on all the Big Macs, you now have to pay for the diet and the by-pass surgery. States simply cannot sustain the level of expansion that the Fed is promoting (California is the classic example).
- No one is quite certain how much of a burden the additional level of newly insureds will be under an expanded Medicaid program. Dozens of states are already suing the Federal government over the expansion, primarily because of my point above but also from the perspective that they (the states) will get stuck with an enormous additional Medicaid cost item. As the expanded Medicaid program will contain fairly lavish and generous benefits, including expanded home and community based care options, the risk of adverse selection is enormous (the risk that people with pent-up demand and existing uncared-for disability will now use the system and the benefits at a level far greater than was initially anticipated). Personally, I believe the adverse selection risk is enormous and terribly misrepresented within the legislation.
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