TGIF! This Friday, I’m focusing on three trends that I think, will have a major impact on healthcare and senior living for the balance of the year and likely, at least the first half of 2024. These trends are in no particular order.
Banking and Credit Struggles: This past week, the Federal Reserve provided some not too encouraging data and outlook on the banking sector via their regular Fed Survey. According to the quarterly Senior Loan Officer Survey, the number of banks increasing loan terms of industrial and commercial loans rose from 44.8% to 46% at the end of 2022. No doubt, this percentage is higher (still) for the first quarter of 2023. Among the conditions driving this tightening are lessening liquidity (deposit level shrinkage), credit quality deterioration (poor performance on loans issued/held), and significant reductions in borrower collateral positions. Loan demand, principally due to higher interest rates, is also significantly trending down for 2023.
Credit tightening and fallow credit demand are typically, signs of weakening economy and a possible recession. The challenge for senior housing and healthcare is that these industries tend to be almost recession proof and always, in need of credit for primarily, plant, property and equipment investment. The senior housing sector is a large consumer of credit for ongoing improvements and for expansion or merger/acquisitions. Likewise, the sector is vulnerable somewhat to rising interest rates as a significant amount of current debt is variable vs. fixed. Quick rate increases place loan covenants at-risk for default.
While I see an end to Fed rate hikes, I don’t see an end to inflation in the near term. With recent CPI (Core inflation too) running around 5% and the Fed funds rate, at 5% to 5.25%, we may see a “hold” period while the Fed waits for the lag effects to further diminish inflation. What is for certain, the current economic conditions will be significantly impactful for the healthcare/senior housing industries for the balance of 2023.
Employment/Labor: For all of healthcare, this is a major concern as demand exceeds supply in nearly all categories of employment and most acutely, for bedside/direct patient care staff. A possible recession and other industry slowdown will benefit healthcare and senior living via increased numbers of non-clinical staff needing work, but that same effect won’t move the supply “needle” on clinicians, especially nursing.
The trend here that I am watching is a bit nuanced. I’m watching the regulatory responses around staffing mandates, particularly in senior living/skilled nursing. The Biden administration has said, along with the 2024 SNF PPS rule that a staffing standard is forthcoming. We have yet to see it but states, such as Connecticut are somewhat ahead of the Feds. But, as of late, reality is beginning to settle-in; namely, the funding cost reality. Connecticut posed a per day increase in hours per patient from 3 to 4.1, along with ratios for certain positions. Both long-term care associations lobbied against the bill stating that while desirable for the industry to accomplish these levels, the reality is that supply won’t allow it. The state Office of Fiscal Analysis said the bill would require an increase in Medicaid spending by $26.6 million in 2025 and $15.5 million in 2026 and 2027.
Pennsylvania ticked-up staffing levels from 2.7 hours per day to 2.87, starting July 1. In July of 2024, the hours per day requirement jumps to 3.2 hours (direct care) per patient. Even though Pennsylvania increased its Medicaid reimbursement by 17.5% in 2017, funding woes for providers still persist. The genesis of the staffing level mandate is a report completed by the Pennsylvania State Government Commission. It noted that working conditions, training and career development were sorely needed to combat negatives about work in long-term care. The report further noted that long-term care spending needed an annual investment of $99.9 million to cover the cost of services which, translates to $12.50 per patient day increase or a Medicaid reimbursement rate of $263.05.
Finally, within the employment/labor trend, I’m watching legislative activity around staffing agencies and specifically, a move to cap the mark-ups that agencies can charge providers. Pennsylvania, in its report (noted) above, noted the rapid increase in agency costs to providers resulting from the pandemic and yet, the limited impact the fee increases matriculated to staff in the form of wages. A recently passed Indiana law includes a provision limiting “predatory practices” by agencies, specifically, price gouing. Minnesota is also working on legislation to increase funding and to in some ways, attempt to address staffing inadequacies.
Patient Transitions/Care Transitions: I’m continuing to watch the post-acute flow dynamics or the admission/transition referrals from hospitals to post-acute providers. My specific focus is on home health which seems to be struggling the most to sustain a referral dynamic that has home care preference but can’t be accommodated by home health agencies. The benefactor of this referral trend is the SNF industry. In a report from Trella Health for 3rd quarter 2022, the SNF industry saw a referral increase of 5.8% (YOY) and the home health industry saw a 8.6% decrease. Hospice referrals remained essentially unchanged. The data is for Medicare Fee-for-Service patients (traditional Medicare), excluding Medicare Advantage referrals. With the growth of Medicare Advantage, I expect to see a continued preference toward home/community discharges yet, staffing levels will dictate how this preference is realized. While home health has a distinct advantage in cost and desire by the patient typically, the setting has challenges to accommodate volume. Productivity levels are currently near the max for many agencies and thus, referral denials are at record levels.
Happy Mother’s Day to all moms and expecting moms, everywhere!