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.
Five Things Every Administrator Should Focus On
I had a phone conversation earlier today with a friend and colleague (he’s part owner of a rehab consulting and management company) and as we talked, the conversation reminded me about the host of issues facing health care administrators. Our conversation flowed to long-term care and specifically, SNFs (he spends a lot of his time with SNFs) and the work his firm is involved with. We kicked around some ideas and as our conversation concluded (hopefully with a golf date soon to be set), I did some thinking.
My friend always tries to get me to do “more” speaking engagements, particularly at conferences and trade association meetings and in this case, he was trying to convince me that the discussion we had was great information that “everyone should know”. Oddly enough, I agree but as time doesn’t always permit me to head out on the speaker’s circuit, it made sense to “boil down” our conversation into a quick written summary.
Health care administration, like any leadership discipline, should be (about) one-third current operations focused and two-thirds future operations focused. I realize, having done the job myself for over twenty years, that some days or even weeks bend this ratio but over the long-haul, in order for an Administrator to lead (regardless of title), he/she must be willing to step a good distance forward to lay the ground work and strategies for “what will be”. In other words, effective administration is about understanding what is going on in the industry, how events or policies, etc. not yet in effect will alter the business, and developing plans and strategies to move the “current” toward the “future’. In simpler language: Effective health care administration is principally about planning. Effective leaders have a running gap analysis in their heads; inherently understanding the current status of operations and matching that with what is yet to transpire. Leaders with tenure have a bit of advantage as they should innately understand historically, how change roles out with new government policies, changes to reimbursement, etc. The experience of having been through numerous changes in the business can’t help, if matched with effective planning abilities, but provide a clearer understanding of how to migrate current operations to the next required level of operations.
Synthesizing from my view, what has and is happening in health care today and what I see and hear about long-term care administration and the organizations in the industry, I hashed out five things (issues, concepts, etc.) that every Administrator (senior leader, etc.) should focus on. Obviously, the list could be expanded but in reality, focus on the key or critical five below will produce the kind of results administrators desire and organizations require.
- Medicare and Reimbursement: Regardless of any white-noise concerning possible delays or advances in the implementation of RUGs IV, MDS 3.0, etc., the path is laid and the dates will occur sooner rather than later. Getting clinical and billing functions up-to-speed, educated, and ready to roll is an absolute necessity. During this process, I’d analyze a whole series of issues and begin to lay the ground-work for any related changes to the present course of business, such as;
- What is the potential impact on my Medicare revenues?
- How is the revenue impact related to my current case-mix?
- Should I begin to adjust my case-mix via different marketing strategies or the implementation of some new clinical programs?
- Does my software/IT systems support new forms, new charting/documentation requirements, assessments, and billing documentation? If not, what is my vendor doing to get us there and when will they be ready?
- Big changes are about to occur in therapies particularly and what, if I am using an outside vendor for therapy, are they doing to be ready? Does this impact our contract and our overall care delivery in any way? Is now a time to consider transitioning to an in-house therapy service?
- Are we, as an organization, actively engaged in communicating what is happening to outside vendors, referral sources, etc.?
- Do we have a fully integrate project plan, budget for change implementation (training, software, etc., costs), and a methodology in-place to review, change and update policies, procedures, forms, etc.? (Names need to be involved, dates set, milestones identified, time set aside for review, time set aside for meetings, etc.)
- Compliance: This is a huge issue today and it continues to grow as health care reform upped the ante once again. There are at least a dozen or more key concerns every organization should have in this area and very recent policy and legislative activities have added to the list. Below is a sample of what should be at the forefront of every administrator’s compliance focus.
- Billing compliance, particularly Medicare. Health care reform and the focus on the part of Medicare to save money via reduction of fraud, waste, and overpayment is a hot topic now. I routinely encounter way too many administrators and organizations that have pushed the revenue per diem issue far too much under Medicare, leaving enormous areas of exposure for recovery actions to occur. In other words, I’ve seen way too much routine high level rehab coding, length of stay elongation, etc. than what the clinical documentation supports. Too often, I encounter MDS coding to substantiate rates of payment and then when the resident’s chart/record is reviewed, the documentation is far different than what appears on the MDS. Administrators need to be wary, even though the revenue numbers look good (perhaps too good), of questionable billing activity under Medicare.
- To the point above and addressed in a recent post here, all organizations should have a compliance plan and now, under health care reform, SNFs are required to have one in place this fall. Compliance is about not just being “compliant” with survey and certification rules but also with other federal laws such as Stark and the False Claims Act. There is no reason that any organization participating in Medicare and Medicaid today does not have a fully developed compliance program and a process for routine audits to preemptively identify,correct, and disclose potentially illegal activity – the ramifications under the law for providers are far too severe. For more information, see my post titled “Stark, Health Care Reform, and Updated Compliance Requirements”.
- There are new privacy and security requirements under HIPAA that organizations need to have in-place. For more information, see my post titled “New HIPAA Provision Now in Effect”.
- Survey and certification requirements such as the QIS are here and the government is in the process of revamping the Five Star rating system. As much as I think the survey and certification process is onerous and unrelated to true care quality, administrators need to understand the peril of poor performance and sub-standard quality. Keeping an up-to-date and clean survey history is vitally important in order to avoid fines, public relations problems, rising liability insurance costs and potential litigation problems.
- Patient/Resident satisfaction is an area that too many administrators believe is unrelated to compliance activity; think again. I see way too many facilities that end-up in compliance problems as a result of resident and family complaints. Dealing with satisfaction across the board is an “ounce of prevention” compared to the “ten pounds of cure” that are required when unsatisfied customers complain to the regulatory authorities.
- Transparency and disclosure are two new buzz words that every administrator should incorporate into operations. In today’s arena, disclosure of ownership, governance, staffing, etc. are the new rules of the road and there is no reason any longer not to publicly embrace a plan of transparency and disclosure of all this information and more.
- Labor Relations: The largest allocation of resources in health care is for staff via wages and benefits, etc. yet I still see too many antiquated labor relations approaches that produce high levels of turnover and poor productivity. To me, it is time for health care to adopt labor relations strategies found in other industries and in companies that have world-class employee productivity, retention, and commitment. Administrators can immediately and positively impact the bottom-line by simply focusing on improving retention, hiring practices (avoiding panic hiring and using better matching strategies), improving supervisor training, removing antiquated pay structures and reward systems, and adopting programs and policies that incorporate employees into the overall strategy and direction of the organization. Stable staff equals better compliance, higher customer satisfaction, higher productivity and lower labor costs (less turnover, less recruiting costs, etc.).
- Risk Management: Leading an organization forward is about identifying “risks” that are inherent in the business and developing plans, strategies and processes to mitigate the impact of risk on the organization’s performance. Though of another way and using a phrase I like and used to use frequently, it is about avoiding the expenditure of “stupid money”. Stupid money is money spent unnecessarily on litigation defense, turnover, higher levels of insurance costs such as liability and worker’s compensation, on agency staff or outside pool staff, on fines and forfeitures, etc. These are all expenses associated with identifiable and known risks and risks that can and should be mitigated by appropriate planning and system implementation. Extremely effective risk management tools and practices don’t require large amounts of investment or even, elaborate policies and procedures.
- The best defense is knowledge – knowledgeable and well-trained staff, active and capable management. Risk management is practice best by management being where the “risk” is, not tucked in an office or tied up in too many meetings with limited purpose, no real agenda, and no specific outcome.
- Using patient/resident satisfaction systems is simple and highly effective at identifying areas of potential problems or risks.
- Using benchmarks available from various industry sources to review facility or organization specific indicators against industry norms.
- Using programs of “gain-sharing” and other incentive compensation practices, tied to compliance, tied to satisfaction, tied to workplace accidents, absenteeism, etc.
- Keeping employees informed regarding organizational policies, standards, plans, etc. Employees involvement and input is a very simple and effective way to mitigate a whole series of risks.
- Using periodic audits to check documentation against billing, patient results and outcomes against set standards (infections, wounds, falls, etc.) and compliance with company policies and procedures.
- Education which can occur via very cost-effective means such as webinars, books, staff to staff training, trade association meetings, etc.
- Purposeful Activity: The famed educational philosopher John Dewey wrote a great deal about “purposeful activity” or the time spent engaged in seeking a desired outcome. For Dewey, this involved the application of the scientific method; the search for answers and insights via a systematic and “purposeful” approach. Health care is a bureaucracy and I watch administrators create additional bureaucracy within their own organizations either in defense of the existing bureaucracy or as a symptom of the bigger bureaucratic problem. I’ve never frankly, understood why health care is so fond of so many committees and meetings that accomplish virtually nothing and consume layers of management staff ad nauseum. Purposeful activity for an administrator is about simplifying as much of the operations and business processes as possible and sticking to some real tried and true managerial and leadership approaches.
- Every meeting must have a purpose, an outcome including a “next step”. No meetings or committees should ever be held or created without a purpose and an outcome and the outcome is never to “meet again”.
- Every manager must have enough authority and be charged with making and held accountable for decisions. Managers that are not accountable for “things” and don’t make decisions are enormous wastes of money and enormous sources of risk. Organizations that allow managers the cover of committees and meetings are wasting enormous amounts of productive energy and time.
- Formal meetings and committees should be entirely focused on two things and only two things; compliance (required reporting and information sharing) and addressing what is “new” or going to be “new”. The latter is about change and developing new strategies or learning, etc.
- Meetings must be brief and have requirements for preparation prior to the meeting and work or tasks to accomplish post the meeting. Discussions don’t require a “meeting”.
- Limit communication via voice mail and e-mail and require people to present their issues in person. Voice mail and e-mail have become the bane of office productivity as they produce “cover”, allowing people not to address what needed or needs to be done. (The famous, “I sent you an e-mail on that”).
- For an administrator, the most purposeful activity is planning and strategizing; taking in information, developing plans and strategies, and assessing the same in light of current operations. All activity, or at least as much as possible, should be focused on improving what exists today, matching future industry trends and requirements with current operations and a strategy to address the future requirements, and communicating what is happening via plans, performance indicators, etc. The test is whether the staff under the administrator can answer, “what happens next and why”.
Health Care Reform Implications: SNFs
The following is a summary of the major provisions in the recently passed health care reform bill. Please note: I have not attempted to cover every nuance in detail but to provide a highlight for a point of reference. If any reader has additional questions or wants additional insight on any particular provision, please let me know. You can find my contact information in the page titled “Author”.
- No targeted elimination or reduction in the market basket for 2010 and 2011.
- Incorporation of a Productivity Adjustment (offset to the market basket) – 2012 (Fiscal year begins Oct. 1, 2011). Estimated payment impact of minus 1% to update.
- Implementation of RUG-IV pushed back to Oct. 1, 2011 but concurrent therapy requirements and MDS 3.0 take effect Oct. 1, 2010.
- Implementation of new transparency requirements (disclosure of ownership) and compliance plan requirements.
- Extension of therapy cap exception process to Dec. 31, 2010.
- Creation of a new Independent Medicare Advisory Board charged with recommending to Congress, payment and spending reforms for Medicare. SNFs, unlike Hospitals (exempt to 2019) are not exempt. The Board will make recommendations to Congress for approval or disapproval.
- By 2013, the Secretary of HHS is charged with developing a bundled payment pilot program for post-acute services. Essentially, all providers within the episode of care (hospitals, physicians, SNFs, home health, etc. as applicable) will received one payment for all care services provided per episode covering a period three-days prior to hospitalization through 30 days post hospital discharge. Participation in the program is voluntary.
- Additional background check requirements for employees and contractors with access to direct patient contact.
- Establishment of a new GAO study on the Five Star Quality Rating system.
- Required reporting of nursing home staffing levels including use of contract/agency staff.
Medicaid
- Inclusion of the Wyden MedPac language requiring that Medicaid must be taken into account during the analysis of provider reimbursements for SNFs (impacts Medicare payments, theoretically)
- Requires states to implement the Medicaid expansion requirements under the law with respect to provider payment changes (physicians), quality improvement, benefit enhancement, eligibility, etc. as a condition of continuing to receive federal Medicaid matching payments. * The reason I included this provision is that states are already burdened within their Medicaid programs for determining eligibility, etc. and additional burdens may negatively impact SNFs waiting for eligibility determinations on Medicaid status. Longer waits for determination and pre-certifications mean longer waits for payment and more billing work for the SNF.
- Coverage expansions under Medicaid and enhanced payments are financed 100% through 2014 and 91% in 2015 (begins Jan. 1, 2013). Optional coverage expansions are not fully financed. * The reason I included this provision is states are already balking at the amount of additional expense Medicaid expansion is adding to their already under-funded Medicaid programs. Even with an extension of the enhanced FMAP, states are still in the hole as the enhanced FMAP could not be used for CHIP expansion costs and had to be gained principally through additional state spending. See my post on Medicaid and Health Care Reform at http://wp.me/ptUlY-2T or alternatively, the Health Reform Updates page on my firm’s E-News site as there is a blurb on Medicaid http://wp.me/PD9Ac-3A
Miscellaneous/Other
- Separate reporting on Medicare cost reports of spending on direct care.
- Independence at “home” demonstration project which coordinates long-term expenditures with support services in the home.
- Expansion of funding for home and community based services/programs.
- Creates three years of new funding for additional training programs for direct care workers providing long-term care services.
- Establishes funding for geriatric education centers for training in chronic care management and geriatrics.
- Increases nursing education loan repayments and removes the caps on funding for nurses working on advanced degrees in nursing.
- Provides for the Community First Choice option allowing for coverage of personal attendant (non-skilled) services in the home plus provides equal spousal income protection provisions under Medicaid for persons receiving Medicaid covered, home-and-community based services.
- Provides a $250 payment for seniors covered under Medicare D who hit the “donut hole” in 2010. Completely eliminates the “donut hole” under Medicare D for brand and generic drugs by 2020.
- Establishes the Elder Justice Act which provides grants for additional protection of nursing home residents and establishes incentives for persons to work in SNF setting.
- CLASS Act provision adopted. Creates the Community Living Assistance and Support Services program that allows individuals to voluntarily purchase a form of long-term care insurance that provides daily payment of $50 to $100 per day for community based support services, in-home care, etc. in the event the individual becomes disabled. Benefits can only be paid if disability occurs five years or more post the start of premium payments. Premiums will be deducted from the individual’s pay-check.
- Eliminates the cost-share under Medicare D for dual eligible (Medicare and Medicaid) individuals receiving Medicaid covered home-and-community based services. Dual eligible individuals in a nursing home are already exempt from paying the Medicare D cost share.
Health Care Reform Implications: Medical Device and DME
Over the next few days I’ll be pushing out a series of posts as my schedule permits, on the implications of health care reform for various industry segments. These are not meant as in-depth analyses, more of a “summary” of the key points.
Reconciliation Act: This Bill has yet to pass the Senate and as a result, it is possible amendments could change these provisions.
The biggest implication is a 2.3% excise tax that goes into effect in 2013. The tax is on manufacturers of devices but exempts Class I devices such as canes, eyeglasses, and hearing aids. Oddly enough, the tax is tax-deductible and applies to all Class II and Class III devices sold beginning Jan 1, 2013. Clearly, the tax impact will be passed along in pricing, assuming price increases will be wholly or partially absorbed via reimbursement. If not, the clear implication is a reduction in margin for device manufacturers.
Other provisions less onerous but still potentially burdensome include a 90 day waiting period for approval of new DME claims to allow the Secretary to conduct analysis of potentially fraudulent claims. This provision assumes the Secretary will identify potential areas of risk and potential categories of supplies that are prone to fraud. I can’t tell from the language whether this will be a “universally applied” wait for all new claims or just certain claims for certain suppliers.
Also within the Reconciliation language is additional funding to fight fraud, waste and abuse. I suspect some allocation of these dollars will be for additional enforcement activity in the Medical Device/DME industry.
Senate Reform Bill: In the Senate Bill the reform bill that will become law today), there are a number of provisions that will impact the industry.
First, there is an imposition of an annual fee on manufacturers and importers of medical devices. The fee is based on 2010 annual sales and will be allocated across the industry based on market share. Best guesses suggest the fee will be in the range of $2 billion. The fee (tax) is non-deductible and doesn’t apply to Class I or Class II device sales or basically any devices sold via retail direct to consumers. Small manufacturers ($5 million or less) will be exempt and manufacturers with sales between $5 million and $25 million will pay 50% of the fee. The Secretary is charged with analyzing the sales of manufacturers and determining the relevant market share of sales for allocation. Again, this applies to non-domestic manufacturers and domestic importers of foreign devices.
The Senate bill expands competitive bidding for DME to 21 additional metro areas and requires the Secretary to nationalize the process and standardize bids by 2018.
Under Medicare, the Senate bill eliminates the 2% add-on payment for DME (above CPI) that Congress provided last year, effective 2014. Instead, the Senate bill incorporates a productivity improvement feature that effectively reduces the DME fee schedule by 1%, applied to the annual update factor for DME.
Finally, the Senate bill eliminates the option for patients to elect Medicare to purchase a power wheelchair within the first month of medical need approval. Instead, Medicare will pay rental on the chair for 13 months, incorporating a portion of the purchase price in its payments to the DME supplier. Effectively, Medicare pays for the chair to the DME supplier over the 13 months at the end of the period, transferring the ownership of the chair to the beneficiary.
In my opinion, the immediate and near-term questions center on whether the Senate will make adjustments to the Reconciliation Bill and will Congress maintain the taxes and fees outlined. Historically, the Congress post-passage of major entitlements and legislation that raises taxes and/or cuts payments has balked to lobbying pressure and ultimately, restored cuts and enhanced payments. In this scenario, anyone’s guess is as good as mine in terms of what could happen.
The Housing Market and CCRC Prospects: What Each Means to the Other
It has been a world-wind few days (make that a week) analyzing all that is or was, health care reform. In some respects, I’m glad that the meat of health care reform is done for now though admittedly, I’m disappointed at the outcome. Suffice to say, I will catch-up on the ramifications of the legislation and the reconciliation package for providers over the course of the next few days. For now however, I need to re-focus on the subject matter pile that is building within my e-mails and my files.
An issue that has drawn a great deal of attention lately is the future and current prospects for CCRCs (Continuing Care Retirement Communities). As I wrote in earlier posts, the CCRC industry was perhaps, the hardest hit by the recent and continuing economic downturn, although not necessarily as bad as some would think. Two highly visible restructurings/bankruptcies involving Erickson and Sunwest placed caution in the minds of the rating agencies and as a result, the analysts at Fitch for example, issued a “negative outlook” for the industry. At the crux of Fitch’s outlook is the dismal residential real estate market performance, the lackluster economy and slow-recovering investment markets (the latter less of an issue today). Correctly, Fitch points out that declines in its CCRC rated borrowers’ financial condition in terms of liquidity and profitability are contributing factors to their negative outlook but they seem to view these conditions as symptoms of the economy rather than tell-tale signs of an exhausted industry.
As I take a close look at the industry and at the comments from Fitch, et. al., it is easy to see how a dim or less than optimistic view can occur. Specifically, here’s what I mean and moreover, why I think there is room for a tad more optimism until one focuses acutely on the real estate market itself.
- The CCRCs that are struggling and those that have gone through highly publicized restructurings, etc. are truly isolated and reflective principally of highly leveraged, aggressively expanded organizations with many unstabilized projects and projects under development. Unstabilized projects and new, in-development projects have unquestionably suffered the most although, some have done fine when they are located in areas or markets that remained more stable during the economic downturn (parts of Texas for example).
- Occupancy dipped a tad as a general condition in 2009 but again, for stabilized operators, not as bad. In fact, the majority of the declines averaged 3.5% to 5% and some operators in good locations, saw virtually no declines, even in projects with 95% to 100% occupancy levels.
- Occupancy dips, such that they were or are combined with price suppression (down economies require providers to hold the line on price increases) and sagging investment values are the cause for the lower liquidity and profitability levels that Fitch reports. The latter two don’t have me terribly concerned as most stabilized and solid operators can handle the modest, temporary price suppression and the once sagging investments should be on much better footing by now as a result of recent improvements in the investment markets.
The residential real estate market is proving to be the biggest lag on CCRC industry performance and unfortunately, I don’t see a lot of cause for optimism that recovery in real estate is near. As much as I am a proponent of creative, strategic marketing for CCRCs as a means of boosting and maintaining occupancy, if a prospective senior can’t sell his/her home or worse, can only do so at a severe discount to value, demand for units and occupancy won’t realistically improve. Entry fee CCRCs will face this predicament in far greater numbers than rental only CCRCs, though rental-based projects will still see some of the same issues. As CCRCs predominantly attract transitioning seniors, those moving from one residential, owner occupied setting to another complimentary setting (CCRC), real estate sales are a significant part of the transition. In short, a lackluster or illiquid residential housing market effectively suppresses the current demand for CCRCs on the part of seniors.
Unfortunately, what I am seeing now in the immediate and near-term outlook for the residential real estate market, particularly for existing home sale prospects, is not encouraging. In January, existing home sales declined by 7.2% over January. This in and of itself is not hard to understand as the November to early December period was a high month for closings due to the expected end of government tax-credits for new home and replacement home buyers. Congress extend the credits through May but the extension occurred a bit too late to match the demand fall-off. The news or trend that is disconcerting in “what” volume is making up the sales and at “what” prices.
More than a third of all current sales are distressed or foreclosed properties and as a result, median sale prices in most markets continue to fall. For a CCRC, the typical prospect is not likely to live in a distressed or foreclosed property and, since the homestead is a significant portion of the prospect’s estate, not as willing to drop the home selling price to match the declining market values. In other words, depressed values and selling prices combined with a great amount of “bargain” inventory means that the senior citizen prospect for the CCRC isn’t likely to sell his or her home in the near future (not enough traffic across all of the inventory options and a seller unwilling or not needing to lower his/her price to match the market price points).
For the balance of the year, especially across the prime sales months of April through September, I expect to see the following occur.
- A gradual increase in sales volume starting now and stabilizing through May – the end of the tax credit extension. April and May should be the heaviest volume months in the first half of the year.
- Average sales prices will continue to decline in the West, South and Midwest regions. Prices seemed to have stabilized and are actually rising every so slightly in the Northeast and in the Northwest. The majority of the suppression on average sale price will continue to come from foreclosures.
- Foreclosures will stay at their current pace for at least the next two quarters, perhaps even to year end. As a result, average prices will remain suppressed as foreclosure sales and distressed sales pull the selling prices down and require sellers to drop asking prices to points or levels proximal to the values of like properties being sold; a dismal trend for seniors wishing to sell a home to move into a CCRC.
- Individual markets and regions will out-perform the nation as a whole but these markets will remain few in number and despite performing better than the national averages, their performance still isn’t great. Examples include Charlotte, NC, Boston, MA, Denver CO, and San Diego and San Francisco, CA. Larger market areas that are performing better can be found in Virginia (D.C. areas), Austin and Dallas Texas areas and the Golden Triangle areas in North Carolina. CCRCs in these areas will find a bit more “rosier” outlooks for converting side-lined prospects to residents in 2010.
- The wild-card for faster more more steady improvement in the residential real estate market is jobs. Improving employment will help to stabilize the real estate market, reduce foreclosures, allow prices to trend back-up slowly and spur more home-buying. As I see only gradual and slow job recovery prospects for the balance of 2010, the spill-over to residential real estate won’t logically occur until months after. Job growth needs to filter to job stability for major investment (consumption) activity to heat back up (there is always a lag).
Hospice Census Issues: A Possible Trend with a Twist?
Lately I’ve been running across intermittent publications/blog posts, etc. regarding a general decline in hospice census. At the end of this post, I’ve attached a couple of links for anyone who wishes to see some examples of what I’ve been reading. Naturally, being the curious consultant and health policy junkie that I am, I started to do a bit of digging. What I found was rather interesting and perhaps, indicative of another trend that may soon emerge.
In my prior career as a health system CEO, I first became seriously interested in hospice in the mid-eighties. The impetus for this was my VP of Religion and Pastoral Care who happened to train with Dr. Elizabeth Kubler-Ross and was (still is actually) a highly respected expert in the field of spirituality, bio-ethics and end-of-life care. Over the years, he often engaged me in debate regarding the high cost of institutional care at the end of life. He also pointed out how inefficient and somewhat demeaning it was for individuals to die in an institutional environment. In our system at the time, we experienced hundreds of deaths annually, the majority in SNFs. With the enormity and complexity of all the SNF regulations, it was extremely difficult to provide lower cost, more creative and thus, more humane end-of-life care in a nursing home. To further complicate matters, like most SNFs at the time (and even still today), our beds were generally configured as semi-private; hardly ideal to accommodate visitors, guests, and privacy.
To resolve the above issue, we started a hospice in the early nineties. We took a different tack however, developing a place of residence and a site for inpatient care initially. As our focus was principally geriatric, we saw the greatest market need as an alternative site to hospitals or SNFs; a hospice site that would provide a lower cost of care, a private room and incorporate all of the latest knowledge in palliative care. We knew at the time that the majority of our patients died in SNFs and hospitals simply because there was no real alternative and given the age of the patient and the lack of willing or able caregivers to accommodate death at home, home hospice was not the solution. To make a long story short, we quickly expanded to a second location and incorporated a home program within our hospice division. Oddly enough, at the time, we became the first free-standing, inpatient and residential hospice in Wisconsin and the sole “geriatric only” hospice in the State and the in the nation. Also at the time, there was one inpatient hospital unit and one free-standing residence. When I left my position as CEO to form my consulting partnership, there were five additional inpatient/residential hospice options and nearly a dozen home hospice options (some related to the inpatient/residential options).
To the point of this post and my observation: Hospice census is getting soft for a number of reasons but the primary driver of the decline that I can verify is too much supply for what is truly, an undeveloped demand. The primary payer for hospice care is Medicare and as I have written in numerous other posts, Medpac and CMS both have targeted hospice as an industry in need of reform. Their scrutiny is born out of a steady increase in the benefit utilization, rapidly increasing lengths of stay, and an increase in the number of hospices that have SNF contracts. To Medpac and CMS, this means potential abuse and to me it means too much supply chasing too little “real” demand. This is particularly true in a down economy where potential demand ( the universe of all terminally ill individuals at any one point) is somewhat disconnected with the health system due to unemployment related job losses and lack of insurance and other providers compete for a scarcer share of patient days.
The difficulty of gauging the true demand for hospice in the U.S. is that the health system presently in place, somewhat restricts the growth of legitimate patient referrals. Combine this with a traditional cultural and religious predilection which values life and technical advancements focused on the restoration of life and hospice becomes relegated to a choice paired with futility. Physicians, the gatekeepers of hospice referrals, are fundamentally incented to do everything (financially, legally, etc.) other than to make the referral. Patients and their families, ignorant about hospice, often know nothing about the benefits available under Medicare, the care that is delivered in a hospice setting, or that a referral to hospice can occur (and should) significantly in advance of imminent death. Without sufficient information about hospice, save the stereotypes, patients and their families must rely on a health system that actually competes against making referrals. While I know this sounds rather harsh, the reality is that most hospitals and physicians are pushed by economic factors, especially of late, to maximize treatment, to maximize tests, and to maximize patient contact that correlates to higher reimbursement, even if the same will in all probability, not change the ultimate outcome: death. A phenomenal source of data on this very subject is available from the Dartmouth Atlas (http://dartmouthatlas.org/).
While I cannot universally verify a trend of softer census, I can verify that census issues are occurring in a variety of hospices, particularly in larger urban and fully developed suburban areas. From the limited research I did conduct, this issue is not new and in fact, has likely been going on for some time. Where census trends are up or a bit more stable is typically in rural areas, fast growing areas or as a result of new or expanded nursing home and assisted living contracts (the latter a somewhat new but growing phenomenon). Areas that have been hit the hardest in the economic downturn are logically, areas with the greatest number of hospices struggling to capture census. Areas that are truly over-bedded in terms of SNFs and hospital capacity are the areas where the “soft census” trend is evident back to late 2008 and early 2009. Not too surprising, these over-bedded areas will not recover any time soon, if at all.
A new trend that is likely to emerge in the immediate future is consolidation or renewed merger/acquisition activity. Industries that have reached a growth plateau or stage of maturation provide marginally higher opportunities for businesses within the industry to consolidate, especially if the overall, longer-term growth prospects remain solid. I like to think of this phase or stage as a period of digestion. Hospice has grown markedly in the last decade, so rapidly in certain areas that the market area is or was saturated and the recent downturn in the economy served to illuminate, how saturated the market really was. In the period or time when the economy was advancing, a hospice could survive on the margins; the leakage that hospitals, physicians and other providers were willing to forego as other business or patient encounter opportunities were perceived as more valuable. As the economy tightened and reversed, the queue of “other more valuable” business evaporated and all remaining revenue generating patients became valuable again, closing the gaps that once leaked patients deemed “played-out”. This cohort of marginal patients (marginal only from the perspective of revenue opportunities) was a few years ago, the life-blood of a number of hospices in an over-developed market. As all providers are now willing to utilize even the most marginal patient encounters today, marketing or census development activities alone will not generate sufficient new referrals (they simply don’t exist) and the remaining strategy is to merge or be acquired.
I would not be surprised to see a steady growth pattern of hospices affiliating with other hospices, either via merger or outright acquisition. The general prospects for the industry are solid but the intermediate future with likely Medicare payment reform, greater OIG scrutiny and new referral and relationship regulations means that marginal hospice providers probably can’t survive sans an affiliation of some sort. Additionally, while the market will grow slightly year over year, I believe hospice has reached a point of maturity as a service or product line. It is truly a niche’ product, one not fully embraced by physicians or for that matter, the general market of patients and their families. As long as the economic incentives remain heaviest on “cures” and the cultural trend continues to embrace life-elongation at all cost, hospice will remain a secondary option for care, offered too late in the end-journey to a population, woefully uneducated and unaware of how valuable a care option it truly is.
The following are a few links to articles I read, prompting this post.
http://www.kaiserhealthnews.org/Columns/2010/February/021810Gleckman.aspx
http://growthhouse.typepad.com/larry_beresford/2010/03/are-hospice-enrollments-declining.html
http://palliativemedicine.blogspot.com/2010/02/can-hospice-and-palliative-care-escape.html
CCRC Update
Within the past ten or so days, I took some time to review the financial and operating benchmarks for CCRCs. The past eighteen months have likely been the toughest operational and financial period ever for CCRCs. By the end of 2009, a small rebound in the economy via an increase in existing home sales, a solid financial markets recovery, and a bit of moderation in the capital markets improved the industry outlook heading into 2010. Specifically, the lagging trends in occupancy stabilized and improved ever-so gently and key operating and capital ratios started to stabilize. The result is that while key medians and benchmarks slid year-over-year (between 08 and 09), 2010 could be rebound year for the industry. Below, I have included a chart of the 2009 CCRC medians as produced by each major rating agency (chart courtesy of BB & T Capital Markets, a division of Scott & Stringfellow, Inc.).
Where continued issues of concern remain are principally in newer, non-stabilized developments, CCRCs located in extremely depressed real-estate markets and CCRCs that are subject to having to refinance favorable debt packages within today’s lending environment (expiring Letters of Credit, etc.). Concerns that were present in early 2009 regarding entry fee CCRCs seem to have moderated as the improved real-estate market has made it possible for prospective residents to either move via selling their homes or be in a positive position to sell their homes in the near future. Again, individual market dynamics play a major factor in how the upcoming months shake-out for new entry-fee CCRC sales.
An area of continued concern for CCRCs is the capital markets and the ability of owners/operators to access new debt at favorable terms. Failures, albeit few in the industry, have made lenders cautious and today, rates and terms reflect the caution as well as the year-over-year decline in the industry benchmarks. Fitch as well as other rating agencies has not yet fully warmed to the prospects of recovery for the industry as a whole and as such, continue to produce negative to bland outlooks for the industry. Essentially, the story here is twofold: First, the upcoming year will remain a fairly down year for development as capital for new projects will not be plentiful and not at favorable terms, and; second, refinancing existing debt for solid operators with stabilized projects will be possible and increasingly so as the year progresses, though not yet at terms and rates that are better than the periods prior to 2008.
Looking at 2009 and ahead into 2010, a few key items for CCRC owners/operators to review are as follows.
- Sales always lag marketing efforts and as a result, CCRCs that have stuck to their marketing plans and stayed engaged with prospective residents will reap the rebound “rewards”. Any CCRC that has pulled too far back on continued marketing needs to get busy now to improve their 2010 prospects.
- Entry fee CCRCs need to be continuously vigilant regarding their pricing and the economic conditions of their market place. Entry fee CCRCs have the most elastic demand curve and price positioning is key to staying forefront in the senior’s demand cycle for retirement housing options.
- When and if the GAO produces its report on CCRCs, the principal focus will be on disclosure and customer knowledge. In effect, the key “take-away” here is this process is all about consumer protection. Aside from making sure the finances are solid, CCRC owners/operators need to beef up their consumer disclosures, their education efforts and clean-up their contracts and marketing materials.
- The four key benchmarks, aside from occupancy, that a CCRC needs to focus on for 2010 are: Net Operating Margin, Excess Margin, Days Cash on Hand, and Debt per Unit or Bed. If a CCRC is considering accessing the capital markets or borrowing from any lending source, moving these indicators up or down as appropriate to rank better than the median will improve the terms and rate available to your project.
- Soft and recovering markets call for strategic pricing evaluation and strategy. It is important to continue to increase revenues but doing so simply through rate increases may not be the best approach. Rate increases are one component of an overall pricing strategy. If a CCRC has not done a complete review of its competitive posture, its pricing structure and especially, its value proposition correlated to price, it should consider doing so immediately.
Non-Profit Health Care Outlook for 2010
Moody’s Investor Service released their annual sector outlook today for not-for-profit health care organizations, stating that they (Moody’s) continue to maintain a “negative” outlook on the industry. Important to note in this report is that the focus is principally on hospitals and since the report is produced by Moody’s, its primary perspective is on credit and investment. That said, even with the predominant focus being on hospitals, there is quite a bit of take-away information for non-profit health care providers in general, including those in the post-acute sectors.
The emphasis Moody’s places on their negative or dim outlook is economic related primarily and public policy weighted secondarily. They point to the continued weak economy as the cause for slack patient volumes and concerns regarding provider debt levels, particularly those providers that may be facing an expiring Letter of Credit (LOC) situation over the next twelve to eighteen months. With regard to public policy issues, Moody’s points to budget insufficiency issues in Medicare and Medicaid foreshadowing tighter or declining reimbursements and uncertainty of the outcome of health reform although, as they indicate, the legislation today, is effectively in limbo.
According to Moody’s, the weaknesses inherent for non-profits are their reliance on governmental sources for payment more so than proprietary operators and their need to be cautious of their tax-exempt status in terms of a political culture requiring more and more justification of expenditures made on behalf of the uninsured or under-insured population. I would also add that other forces such as unions are today, targeting non-profits more so than ever and the result is higher labor costs and higher legal defense costs (to abate organizing campaigns). Similarly, the plaintiff’s bar is far more active today and for non-profits, their fair-haired status once given due to religious affiliations primarily, is all but gone. It is not uncommon any longer for attorneys to seek damages against large or for that matter, even small to medium-sized non-profit providers.
The report cites the following reasons as the primary factors contributing to Moody’s negative outlook.
- Sluggish patient volumes due to high levels of unemployment combined with the loss of health insurance.
- Pressure on revenue streams, particularly Medicare and Medicaid combined with intensified recovery activity (RACs and Probes).
- Greater difficulty in cutting costs due to the cost-cutting measures already undertaken in 2009 and late 2008. There is little room remaining for significant expense reductions.
- Increasing bad-debt exposure.
- Debt structure and liquidity risks driven by high bank exposure, potentially expiring LOCs and less than a full recovery of investment losses.
- Greater or increasing capital needs after a year or more of deferred capital spending.
- Expiration of the federal stimulus program at year-end 2010.
In addition to the above negatives, Moody’s cites three positive factors.
- For some providers, strong management capability that allows the provider to respond quickly to negative operating changes and positive improvements as they occur.
- Partial recovery of investment losses adding back some liquidity.
- Likely increase in merger and acquisition activity which Moody’s believes is good for the market.
As I reviewed the report, my conclusions are as follows. These conclusions I believe, are universal for all non-profit health care providers.
- The pace of economic recovery will push forward or hold back, the recovery of non-profit health care provider’s fortunes. A quickening pace including job growth will help providers recover quicker although a lag in terms of patient volume increases will clearly be present. A slow, mixed recovery with equally elongated new job creation will hurt providers and potentially, lead to insolvencies and failures. The key to remaining solvent in the event of a slow recovery is debt structure, depth of product/service mix and generally low non-wage related labor costs (turnover, legal issues, compliance problems, supplemental staffing costs, etc.).
- Access to capital at reasonable terms will remain an issue for the sector throughout the bulk of 2010. While I see some softening, the present stance the Feds are taking on taxing the banking industry could very quickly, chill any warmth that has softened the credit markets. Within the next twelve to eighteen months, a very large ($19 billion) amount of Letters of Credit will come due. Providers with struggling balance sheets or under-performing newer projects may struggle to meet new conditions and terms to enhance their credit. Without question, debt costs and the related costs associated with debt issuance will continue to be higher than any period over the last five plus years. The significant question remaining about access to capital is what role the Feds will play and will they continue to bolster lending activities via HUD to help stabilize some of the credit/lending markets.
- Of particular concern to me and in concert with the point immediately above is the growth in deferred capital investing that is occurring, particularly in the SNF industry. This industry is already dominated by aging physical plants and as providers have been forced to defer capital investment due to the economy and due to the reimbursement climate, the industry continues to shed asset wealth via depreciation and become more functionally obsolete. With growing regulatory pressure for SNFs in terms of environmental standards and new mandates on fire suppression systems, access to reasonable cost capital will be imperative for this industry to modernize and recapture at least a portion of its physical plant asset wealth.
- With health reform on the Washington back-burner for the moment, I believe providers will tend to breath a collective sigh of relief – prematurely. While I believe that a reform conflagration is not imminent, the fiscal woes of Medicare and Medicaid trudge on and as a result, the reimbursement outlook from my perspective, remains rather bleak. There will be continued financial pressure at the federal and state levels to reduce or reign in the trajectory of entitlement spending and as a result, I believe providers need to be vigilant about the prospects of flat to declining reimbursement rates. Of particular concern to providers should be Medicaid which today, is heavily bolstered by federal stimulus dollars set to evaporate in December. With state budgets remaining in the “tank” due to the slow recovering economy, states are going to be looking for Medicaid savings with a vengeance unless the feds continue additional matching provisions or add new dollars.
- In the merger and acquisition area I’m less of a believer that this market will heat-up than Moody’s is. I think that the time is certainly ripe for some increase in activity but I believe that the credit markets will have more to say about the volume than the desire of providers to acquire or be acquired. I do believe however that this is an opportune time for non-profits to look at merger and affiliation arrangements as opportunities are plentiful, the benefits of consolidating balance-sheets are obvious, synergies can be maximized across and within markets, and the costs of mergers/affiliations are far less and can be completed with minimal to no need for new debt.
Any readers that would like a PDF copy of the Moody’s report can go to the Author page and send me an e-mail request. In your request, please provide me with your full name and a working e-mail address that I can use to forward the document.
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