Supreme Court Decides: Nursing Home Residents/Families Can Sue Public Facilities
This morning, the Supreme Court ruled that residents and their surviving heirs/family members can sue a publicly owned nursing home under the Federal Nursing Home Reform Act. The court upheld a lower court ruling against the Health and Hospital Corporation of Marion County (HHC). This organization operates publicly owned (governmental) SNFs in Indiana. A couple of months ago, I wrote about this case in another post. Readers can access the post here: https://wp.me/ptUlY-vu
HHC had argued that the existing federal Conditions of Participation for SNFs governing Medicare and Medicaid participation was the proper avenue for recourse against care violations or other procedural violations, not civil court.
In this case, a family (Tavelski) sued HHC for mistreatment regarding the use of psychotropic medications and transfers to other facilities without permission/patient (or designated surrogate) consent. HHC alleged that the Tavelski family could not pursue civil action but instead, had to use administrative remedies available to them in the federal and state SNF code.
The fundamental question that was addressed was whether patients/families could pursue civil action via the courts against publicly (county/state) facilities under the Nursing Home Reform Act of 1987 OR, was the sole course of remedies available, only via administrative law (grievance, appeals, etc.) through CMS. The Court found that nothing in the Nursing Home Reform Act precluded a family/patient from accessing the courts for remedies, if applicable.
The decision will have far-reaching implications beyond nursing home residents/families having a right of private legal action. The decision will branch to other matters involved Medicaid access, insurance rights, benefit qualifications, prior authorization, enrollment, etc., including for families and children with respect to Medicaid. Prior law required redress of any issues to be made through the applicable state or federal agency via administrative appeals.
The full Supreme Court decision is available here: Tavelski Decision 6 8 23
Merge/Affiliation Strategy – Checklist
In April I wrote a post regarding mergers and affiliations in health care – hospitals and senior living. As demographics shift, reimbursement and health policy dynamics change, organizations continue to evaluate the benefit of remaining independent or developing strategic partnerships via affiliation or merger. Size and scale are not the lone determinants as we have seen via large hospital system affiliations. In my post I noted the affiliation upcoming between Froedtert/Medical College and Theda Care, both large hospital and physician group systems in eastern Wisconsin (Milwaukee to Fox Valley). Both had market presence sufficient to remain independent yet each saw trends and possible synergies that suggested an opportunity to partner was more advantageous to their respective missions than remaining independent. Was longer term survival for each and issue, not necessarily. Was longer term growth and market development a bigger issue? More than likely. This is the essence of merger/affiliation strategy. The April post is here: https://wp.me/ptUlY-tH
For non-profits, sales or acquisitions of the primary parent are difficult and complex. A non-profit can readily acquire a for-profit organization rather simply but being acquired creates different tax implications and liquidation of the net purchase proceeds into some charity or range of charities. The dissolution of a non-profit is not an event where owners or individuals are beneficiaries of the sale. The final beneficiary or beneficiaries are charities, likely pre-named in the original organizing documents or an updated version thereof. As mission is the primary driver of why the non-profit provider organization exists, outright sales are uncommon. Mergers/affiliations that don’t produce a purchase price whereby cash (or similar) is exchanged is the preferred methodology for changes in control or quasi-collaboration such that acquisition does not occur.
My strategy framework applies basically to non-profits whereby, the approach is not outright a purchase of assets (acquisition). This is not to say that elements of a common acquisition don’t occur such as change of governance and ultimate control perhaps, of subsidiary organizations and goodwill elements such as name, brand, certain contracts, etc. This is why readers will note that my strategy framework contains similar elements to an acquisition strategy.
The worksheet for analyzing and conducting a merger or affiliation is attached here. It is free to download, circulate, and of course, use or reference. Merger Affiliation Worksheet
SNFs Get Ready – Claims Audits Start Soon!
Recently, CMS announced that its Medicare Audit Contractors (MACS) would soon commence (June 5) a five-claim audit process for every nursing home in the nation participating in the Medicare program. The reviews are set to occur on a rolling basis whereby each MAC in its region, will begin by pulling five Medicare claims from each provider in their region, assessing the claims for billing errors. The genesis of this program is a Health and Human Services report that noted that (approximately) one-fourth of all SNF claims were improper as supported by documentation. In CMS language improper means overbilling vs. underbilling.
The goal of the claims review program is purportedly a combination of recoupment when payment is too high combined with education. It is likely that providers with prior bad history of ADR (Additional Documentation Requests) or probes, if their performance on this review is poor, will receive additional follow-up attention. The claim reviews are pre-payment vs. post-payment.
From the Medicare FFS (Fee for Service) Improper Payment Report (all provider types) for 2022, I included two pages with data, illustrative of the SNF improper payment issue and the reasons why. The pages are located here:2022 Improper Payment Report – SNF The most common cause of impropriety was insufficient documentation. Some of this continues to relate to PDPM as SNFs in many regards, lag in terms of MDS coding knowledge and billing education. COVID did not help. Other issues are as simple as improper certification times, illegible signatures, improper Section GG (therapy coding) and improper diagnosis codes. Per CMS, the improper payment amount for 2022 is estimated to be $5.8 billion.
My caution here for all post-acute providers but especially for SNFs and Home Health Agencies, claims audits are here to stay. According to Altarum’s Health Economic Sector Index, SNFs spending increased 11.6% YoY (March) and Home Health spending increased 8.7%. Outlays, within programs with known billing impropriety issues, beget claims reviews. The full Altarum brief is here: https://altarum.org/publications/may-2023-health-sector-economic-indicators-briefs
As I have written before, compliance is a fairly new requirement for SNFs. Within the ethics and compliance Condition of Participation found at 483.85 (F- 895) SNFs must, among a number of requirements, implement a system (reasonable with policies and procedures) to find and correct, improper billing practices such that the same, could be fraudulent or could be in violation of federal law. The last element, violation of federal law is tricky. It is against the law to bill Medicare for care that is rendered improperly or is sub-standard. Technically, care provided to a resident, billed to Medicare, later determined to be harmful via a survey (G level violation or worse) is a violation of federal law. A decent overview of the compliance requirement is available here ComplianceandEthics 483.85
Essentially, post-acute care providers, particularly HHAs and SNFs need to develop a comprehensive ethics and compliance program that INCLUDES regular claim audits. The difficulty, however, is for the audits to be useful and proper, the same should be conducted by an independent auditor. This can be costly and often, non-helpful when the auditor is not uniquely familiar to normal provider operations and typical survey and certification processes. The goal of the audit process is detection and then, education. Incorporated properly within a well-developed ethics and compliance framework, the audits can be completed efficiently and wrapped within a proper QAPI (Quality Assurance) function. Done right, the ethics and compliance program dovetails into a QAPI program and vice-versa. This reduces separate work, enhances process improvement, focuses on resident/patient care and how the same is effectively provided, properly documented, and properly billed. Watch this site for more on this topic and for additional tools that I have developed and effectively used with H2 Healthcare clients.
A bit of travel awaits so I will not offer new posts/updates until next week. Until then, Vaya con Dios!
Friday Feature: SNFs Still Make Sense
For some recent years, enhanced by the pandemic, the role of SNFs in the post-acute/senior living industry has tarnished. Residents and families often view the SNF as a “negative place” to reside, even if for short-term recuperation. Clinical staff take a dim view of the care complexity such that the SNF is a downgraded clinical setting, less than a hospital or outpatient setting. Providers, struggling with reimbursement inadequacy and advancing regulation, have reduced beds or closed locations. Some organizations like CCRCs, have minimized bed capacity or completely eliminated the SNF and moved to advanced Assisted Living care as the highest available care option for residents. Yet, in spite of these trends and the tarnish, SNFs have a place in the continuum and in some regards, and advancing place.
What challenges the SNF industry and thus, its reputation, are more external forces than flaws in the core purpose of an SNF. External forces such as onerous and increasing regulation, below cost reimbursement, and labor shortages are the most common forces providers deal with. Gone are the days where nursing homes were locations of long-term stays, typified by years of residency. Where and when this still occurs is for residents with early-age disabilities, or for residents that have minimal financial means such that Medicaid nursing home benefits are the primary level of support for care. With Medicaid supports via waiver programs expanding, long-term skilled nursing care includes primarily the most complicated residents, those with multiple conditions requiring skilled nursing interventions weekly or even, daily. Examples include ventilator care, dialysis, tube feedings, ostomy care, etc. While these services can be provided in the home or a non-SNF setting, location challenges often make an inpatient environment (SNF), the best place for consistent care when required.
The demographics forward, favor a post-acute, SNF setting. Despite the push for post-acute care to migrate to home settings with home health the reality remains, this is not the answer for every patient. The older the patient, the number of comorbidities involved, the nature of the comorbidities, the presence of an aging spouse with health challenges, etc. all are a predicate to whether or not, home care via home health is viable. Today, even access to home health can be challenging if not, impossible. The staffing challenges all health care providers face are particularly daunting for home health agencies where, acceptance of cases, especially complex cases, comes down to having available staff to meet patient needs. As home health care by its nature is inefficient, facility-based care can be more feasible when complexity of the case is at issue and the availability of staff is challenged. In other words, staffing one location that can accommodate say 60 residents, is easier than staffing a caseload of 60 separated by travel with distances expressed in miles.
The SNF industry and the facilities within tend to be some of the oldest classes of assets in the senior living industry. The cost of new construction is high and without access to a very high-quality payer mix, the returns are challenging. For providers than can maintain solid occupancy and high-quality payer mixes (Medicare, insurance, private pay), the returns are solid and the access to capital is there. Medicare Advantage plans are starting to create solid value-based care propositions for good providers with exceptional quality records AND great care coordination partners. For example, an SNF that has a relationship with a Home Health Agency, either owned or in partnership, has the ability to package price disease management approaches by common clinical conditions that include SNF care and HHA care, all bundled, and care coordinated. If the pricing is mapped with overall savings, reductions in re-hospitalizations, improved patient outcomes and satisfaction, the opportunities going forward are significant. I have a number of pathways/algorithms that fit this example. A few can be downloaded here.
What headwinds lie ahead fall mostly around staffing, regulation, and reimbursement. Oddly enough, the failures that will inevitably occur necessitating closures and bed reductions, will make good SNFs stronger going forward. The demand by demographics and patient needs is only increasing. There will be a significant role for SNFs to play in meeting the market needs. The questions that beg are around reimbursement keeping up with increasing costs and how disconnected will new staffing regulations be to the reality of the labor markets. As I have said in other posts, mandates make no sense when in all reality, the mandate cannot be met now, or anytime in the near future.
Bottom-line: Banks are still willing to lend to good providers. REIT capital is available as is private equity for facility improvements and modifications. Demand is decent and recovering. There is a lot of pent-up demand as well, post-COVID. Valuations have remained stable for SNFs as well. Plenty of partners exist, more so than other senior living segments (hospitals, Med Advantage plans, health systems, Home Health Agencies, etc.).
Litigation risk is still an issue but a recent court case in Washington involving Life Care Centers of America concerning COVID and the liability for infections obtained in an SNF was found favorably for Life Care Centers. One case, however, is not a trend but it is a good sign that perhaps, the SNF industry will not be overwhelmed by COVID litigation pertaining to outbreaks and occurrences in facilities. A synopsis of the case is available here: https://www.mcknights.com/news/life-care-centers-vindicated-in-early-covid-wrongful-death-case/?utm_source=newsletter&utm_medium=email&utm_campaign=NWLTR_MLT_DAILYUPDATE_052323&hmEmail=IjP1GPaY%2BJ2uvsLxTJ79bVeRWY7ycbnr&sha256email=aa4cb7c695037c31a216b9562788596b6fcd012145d566f31440b6fcd139c8a9&elqTrackId=2c80aade4c3647c8ab5b85f72fb85138&elq=8a824ff9b15249a9bf296d2d2c1be9e8&elqaid=4134&elqat=1&elqCampaignId=2746
Well-run, well-capitalized SNFs with more modern physical plants have a solid opportunity in the evolving post-acute industry. Challenges exist but opportunities do as well and, in my opinion, the opportunities outweigh the challenges for operators that understand value-based care models, are willing to develop partnerships, can maintain staff, and have great quality and service records.
Senior Housing and the Real Estate Market – Status
While we are seeing incremental occupancy gains in senior housing, the increases are slow but steady. Is there a leveling-off point upcoming? Perhaps. Regardless, even with the recent history of gains, there is a reason to be a bit skeptical for some product types to continue to improve. My skepticism rests at the Independent Living product level, specifically on above-market rate units and entry fee units. The reasons are the real estate market and the economy.
IL housing and CCRC IL units are interconnected with the residential real estate market. Though demand for these product types has proven durable, the demand is highly price elastic. In other words, as these product types tend to be rather pricy, higher than comparable living conditions, economic forces that constrain value (either real estate or estate), shift demand away from higher priced product offerings. Today, the real estate market with its conditions somewhat similar to 2008-2010, is creating a negative drag for senior housing demand, specifically, entry-fee units and high-end above market rate IL units.
Per NIC (National lnvestment Center), while occupancy levels for IL improved in April 2023, the same remain 4.4% below pre-pandemic levels for the same period (March 2020). In the major metro areas that NIC tracks data, only 4 markets out of 31 have moved back or above, pre-pandemic levels (e.g., San Antonio and Pittsburg). Interesting to note however, is that the recovered levels still reflect occupancy averages below 90%.
Demographic trends for senior housing remain solid and new inventory is almost non-existent due to high development costs (interest rates and construction supply and labor costs). These forecast opportunity for occupancy improvement BUT, residential real estate conditions (current) create a significant drag. Higher interest rates (decade plus high) and tighter lending conditions plus a Fed Reserve that is not consuming mortgages today, suppresses buyers. While home values expressed as prices are stable to slightly increasing, the liquidity conditions necessary for homes to be fluidly sold (ready credit, favorable lending conditions), are not favorable today.
Below are some of the current non-favorable residential real estate conditions that are dragging home sales and thus, keeping seniors tight to their residence (and out of a CCRC/IL move queue).
- Supply of homes for sale overall is low, much due to existing residences with low interest rate mortgages (below 4%). These low rates make it exceptionally difficult for the current owner to sell and buy a new home with an equal cost-factor (same mortgage level).
- Zilllow is forecasting home prices to increase modestly over the next two to three years: 3% range with a peak or event slight fallback, possible. The cause is rising interest rates, credit tightening and an increase in housing supply but primarily, rental supply.
- The Case-Shiller/S&P Index for home values/prices illustrates a significant slow-down in home values. As long as mortgage rates remain high, combined with tightened bank credit policies, home values increases will be slower than 2019 to 2020.
- Mortage rate forecast track close to inflation expectations. Most economists believe inflation will remain higher than pre-pandemic levels for at least the next twelve months. While a recession will likely cause Federal Reserve rate reductions, the depth and strength of a full-blow economic slowdown will also, hurt home sales. Recessions typically come with job losses and job losses/higher unemployment drive buyers away from residential home purchases, pushing more people into rental real estate options.
Another overall set of numbers I am watching in conjunction with CCRC/IL demand tie to returns on investment assets or asset classes. CCRC movement in terms of new entrants is yes, impacted by the liquidity of residential real estate but similarly, by the overall condition of the economy. Social Security increases boosted incomes but, the reduction in overall estate values tied to other asset classes, puts a damper on the estate values of seniors. Reductions in investments and estate values, even if real estate prices remain solid, create a general sentiment of negativity such tha timing of making a major CCRC entry fee investment is viewed less favorably. Higher-end IL options are living choices not typically, living requirements. Sentiment, feelings about where the economy is at and where the health of an estate is at, propel or drag, investment and moving decisions. Today the sentiment is “drag”. Below is a graph illustrating inflation, the home value index (Case Shiller) and the Bank of America/U.S. Corp. Total Investment Return index tracked by the Federal Reserve. The blue line is CPI, the red line is the Case Shiller Index, and the green line is the Total Return Index.
While the Case Shiller trend has been modestly up and then steady to slightly down, the investment/total return index has been on a down trend for nearly three years – since September of 2020. Until this index comes closer to the inflation index which, will only really occur as inflation moves down, consumer sentiment about the economy will remain soft. This soft sentiment for senior adults with few years of life left for recovery, creates the pessimism around moving and investing in a higher cost, higher end lifestyle in CCRCs or high-end rental projects.
My outlook is for a softer demand cycle as long as economic conditions for investments and residential real estate remain proximal to their current position. Seniors will have less opportunity to liquidate a primary residence and while those that do will receive decent prices, their overall estate values in terms of real estate and savings, will have shrunk in real purchasing power. Inflation reduces wealth and purchasing power. The cures unfortunately, are a bit brutal and tend to impact middle class seniors the most, especially those in the prime age demographic for CCRCs and IL housing. Operators are going to have to continue to market and be creative and likely continue to use incentives, to gain incremental occuppancy.
Insight: CEO Turnover
During the pandemic and continuing somewhat through current, healthcare turnover has been on the rise. Nursing turnover (from direct care) and retirements exploded by mid-pandemic. Burnout was high as was job dissatisfaction. What became evident is the linkage between staff turnover and staffing difficulties along with COVID policy, and CEO turnover. While 2021 turnover was proximal to prior year norms, 2022 is showing an increase as the pandemic wanes but other headwinds increase.
According to Challenger, Gray & Christmas (executive outplacement firm), there were 62 hospital CEOs that called it quits in the first half of 2022 versus 42 in 2021. The impact is actually a bit more pronounced as the overall number of CEO positions has declined due to consolidations and closures. This same source indicates that the primary causes of turnover are COVID burnout, rising capital costs, capital access constraints, and staffing. Financial pressures due to these factors, evidenced by multi-billion-dollar losses at even the largest systems (Ascension $4.7 billion, CommonSpirit $3.7 billion) further contribute to turnover.
Senior Living/Post-Acute care is walking an almost parallel line in terms of turnover at the CEO level. Longer term, large provider executives are at retirement ages. The industry has not generated younger executive leadership in proportion to the positions that are turning. Talking with some of the larger recruiting firms specializing in Senior Living (e.g., Witt/Kiefer), even prominent positions at large non-profit organizations are struggling to source qualified candidates. The experience levels across the expanding system offerings (e.g., hospice, home health, post-acute services) aren’t universally held in various areas. Demand is high but quality candidate numbers are lower than say, 10 years ago. Further, market challenges in some areas such as high litigation, (low) available staff numbers, and changing demographics (think Chicago, Detroit, Portland) place boundaries on candidate opportunities. Simply put, many candidates have no desire to relocate to challenged locations.
Looking at key position availability by title, LinkedIn shows over 6,000 executive director/C-level openings in senior living. By comparison, LinkedIn shows hospital C-level openings at 738. The average tenure today for any healthcare CEO is a smidge over 5 years. Twenty years prior, the average tenure was between 10 and 15 years. Below are some interesting CEO turnover data points from Becker’s Hospital Review.
The average hospital CEO tenure is under 3.5 years.
• Fifty-six percent of CEO turnovers are involuntary.
• When a new CEO is hired, almost half of CFOs, COOs and CIOs are fired within nine months.
• Within two months of a new CEO appointment, 87 percent of CMOs are replaced.
• Ninety-four percent of new CEOs without healthcare sector experience believe extensive healthcare knowledge is not necessary to replace senior management positions.
• Eighty-nine percent of people involved in the hiring process believe a broad area of business expertise is beneficial in a hospital CEO position.
• Most new hospital CEO candidates come from a venture capital/private equity industry background (42 percent,) followed by finance and accounting (40 percent,) banking (32 percent) and marketing and sales (19 percent.)
An element not often factored into CEO turnover is the ripple effect. According to the American College of Healthcare Executives, the departure of the CEO is followed by departures of 77% of Chief Medical Officers and 52% of Chief Operating Officers. I have seen wholesale executive staff departures (CFO, COO, CPO/HR, etc.) in less than six months post the departure of a popular/effective CEO. In rural settings, the loss of a healthcare CEO can be even more painful as the executive role within the community in terms of service on various boards and civic organizations is lost with the vacation.
Addressing CEO turnover today is a function of understanding the key contributing factors. Below is a solid list that I have compiled over the past three or so decades of my work in the industry.
- Difficult relationships between the CEO and the Board
- The regulatory and reimbursement environment is becoming more challenging
- Profit motives out rank care strategies and growth
- Cultural misalignment
- Geography/location
- Challenges with helping board members understand their roles (often, board members are appointed/recruited from within, without proper training and onboarding)
- Capital access challenges
- Staffing challenges/building and maintaining a core team
- Compensation and benefits (an inability to maintain competitive compensation)
Given the above, and the fact that the majority of turnover is non-voluntary today, the industry volatility creates planning challenges. With average tenure at right around 5 years, constant and consistent succession planning for the healthcare organization is required. I’d argue, given the overall lack of qualified candidates that can be source externally, an internal leadership development process is preferable. What I have seen is that internal candidates tend to create less ripple turnover and have an advantage such that they know the culture and organizational capacity. The downside, however, is that internal candidates can have too many organizational biases and bred relationships such that creating change and new strategies that challenge the status quo (we’ve always done it this way), becomes difficult if not, improbable.
Senior Housing/Senior Living Debt Review
Senior housing in the form of CCRCs, Independent Living and Assisted Living (including memory care) is a large user of debt financing. While equity has become more prevalent via increasing private equity interests in senior living, operators, especially non-profits, continue to rely heavily on bank and bond financing. Private equity and venture capital investment trends tend to curve toward newer projects, acquisitions, healthcare offerings on the post-acute side (home health for example) and other ancillary businesses (SNFists/intensivist physician practices, pharmacy, therapy). Given the current economic conditions and banking environment, now is a good time to take a look at where the senior housing/senior living industry is from a financing perspective.
Perhaps the largest current concern focuses on existing debt that comes due in 2023 and 2024. The industry will see billions of bank and bond debt that matures or has variable rate features that will reprice across the next twelve to eighteen months. Two challenges thus exist. First, the cost of capital, expressed as interest rates, is higher now than it has been for the last fifteen years. While the rate environment (expressed as climbing or falling) seems to tack to a stable point, inflation has yet to fall to Fed target levels. As long as inflation remains high, the risk of the Fed continuing to raise rates remains. Effectively, expiring debt that requires refinancing will cost more going forward. Debt that is variable and repricing will cost more. Depending on the rate increase level, providers may face significant margin erosion and/or operational drag as debt service costs increase. A chart of the last twenty years is below. More analysis is also available here: <a href=’https://www.macrotrends.net/2015/fed-funds-rate-historical-chart’>Federal Funds Rate – 62 Year Historical Chart</a>
The second challenge is capital access. While rate is a concern, accessing capital is also a concern as lending conditions have tightened due to bank capital structural changes and generalized commercial credit concerns – real estate in particular. Valuation challenges also come into play such that operators/owners may find the overall value of their projects has changed, negatively so. Credit access is not only a function of real property collateral (value) but also, the strength of operations to meet debt service requirements. With occupancy challenges remaining, though improvement is occurring, and costs rising faster than revenues in many organizations (labor, energy, supply), credit profiles for providers (owners) have changed – negatively. In short, the spigot of available capital is less open now than it was, pre-pandemic.
The pandemic slowed the pace of property improvement and to a certain extent, the deferred maintenance “bill” for needed improvement is now coming due. Per NIC (National Investment Conference), across 31 markets that they track for senior housing data, two-thirds of the communities in these markets are old and in need of improvement – redevelopment or major upgrade. This of course, begets a need for capital and today, the capital availability is not as prevalent as five years ago and the cost of the capital, three to five times more expensive.
When improvement is required, capital access and cost are relevant but so is the cost of the improvement. The industry is seeing a bit of a perfect storm (currently) as capital is more expensive and construction costs are as well. In this scenario. project feasibility and payback conditions become stressed. Infrastructure improvements or community updates and refreshment may be required just to retain occupancy or to manage market share BUT the same may beget no new revenue or minimal revenue increase opportunities, not proportional to the investment. For many of these older communities, market location and property composition are such that significant increased revenue opportunity is unlikely. Given this prospect, the alternative to improvement via financing may be for some, merger or affiliation. See my post on this topic here: https://wp.me/ptUlY-tH
Bank debt/lending continues to be the primary source for capital but recent banking failures have tightened lending activity. We saw a bit of improvement via mini-perm lending at FYE 2022 but even there, overall loan volumes remained down compared to pre-pandemic levels. Balances did stay near all-time highs for housing but nursing care balances reduced. Construction lending remained soft and I suspect, it will continue this trend for the balance of 2023 and into 2024. Nursing care construction lending remained suppressed and senior housing construction lending sat at a quarter of 2016 levels. A good overview from NIC is here: NIC_Lender_Survey_Report_4Q_2022_FINAL
What I’ll be watching are default levels and loan volume (new levels). If we see a condition of softening rates later this year, volumes will lag but loans in-queue will tick-up. There is definitely some pent-up demand for capital and any condition or combination, of softer rates and lower construction costs due to a recession or slower overall commercial activity will ignite senior housing capital access demand. I’ll also pay close attention going forward, to default or pre-default conditions that motivate additional acquisition and affiliation deals. Softer valuation levels are good for buyers that have existing capital capacity or in some cases, equity raised capital, ready for investment. The key is patience and market conditions that produce deals that have inherent, accretive value prospects.
Friday Feature: Three Trends to Watch
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!
Senior Housing/Post-Acute Insurance Update
With so much going on in the industry post-COVID, challenging labor markets, rising interest rate costs, high inflation, and supply chain issues still somewhat bothersome, insurers are rightfully skittish about senior housing and the post-acute environment. Of course, good provides with solid track records, high quality records, low to no recent claims, and evidence of financial stability will achieve continued coverage, at the best rates. This said, rates are trending up and even the best providers will experience the industry drag effects that afflict all, some more and some less.
As I’ve written before, litigation is still a big issue and growing. Drivers include staffing shortages, COVID policies that caused isolation and physical/social decline, state laws without liability caps, and a generalized negative view of certain provider segments (e.g., SNFs). Three recent posts address some of these issues: https://wp.me/ptUlY-sg , https://wp.me/ptUlY-sp , https://wp.me/ptUlY-sC .
One developing trend has major forward ramification for liability coverage and worker’s compensation coverage – COVID litigation. A California Supreme Court case argued this week centers on “COVID take-home liability”. Formally, the case is Kuciemba, et.al., v. Victory Woodworks. It centers on the question of whether a spouse that is thought to have acquired COVID at work and subsequently, infected a family member at home, can sue his/her employer. The essential point is whether an employer (under California law) has the duty to exercise extraordinary care to prevent the spread of COVID. If the petitioner succeeds, the door is wide-open for extensive litigation, especially for SNFs, hospitals, and other healthcare settings where COVID outbreaks were prevalent, and staff infections, equally prevalent. The issue will no doubt hinge on the ability to prevent the spread of highly contagious, aerosolized viruses and the ability to detect where and when, the infection occurred. Studies of contact tracing during COVID illustrate the difficulty of identifying sources of COVID. More on this case is here: https://www.mcknights.com/news/employer-protections-in-spotlight-as-court-considers-take-home-covid-liability/
We are currently seeing a widening bifurcation of the industry segments between good performers and facilities/organizations that are more challenged. We are also seeing insurers becoming a bit more leery of location risks within states with litigious history and limited tort reform laws (e.g., California, New Jersey, New York). Greater focus is being placed on risk mitigation programs and compliance programs, so much so that providers without these programs are finding themselves in difficult positions when it comes to renewals (pricing and competition). The big watch of course is as identified in the prior paragraph, COVID litigation and litigation in general.
Below is the generalized trends for renewals, in the senior housing/post-acute industries. The data comes from WTW – Williams Tower Watson.
- General and Professional Liability: Flat to 15% for providers with good history/performance. Higher for poor performers and/or poor venues/locations.
- Property Insurance with high, stable census: Plus 10% to 20%.
- Property with challenged occupancy: Plus 25% to 40%.
- Worker’s Comp: Minus 5% to plus 2%.
- Auto: Plus 5% to 10%.
The challenges on the property side are driven by a number of factors. Recent hurricane losses and winter storm losses hit providers hard though, the driver is more about restoration costs and valuation difference than the actual loss numbers. Loss numbers are on a bit of an upward cycle but the economic conditions of tight supply chains (replacement building supplies), labor cost and shortages in construction trades, and the cost of money/capital are the primary contributing cost drivers. Insurers are wary that valuations are perhaps, significantly understated today and as such, policies are being written with higher retention levels and reduced overall limits to mitigate, valuation (understatement) risks.
Looking forward, I believe more of the same increase trend is on the horizon. It appears that we will begin to see some softer property renewals going forward as valuation risks abate and repair/replacement costs ameliorate. If a recession occurs in the latter half of the year and into 2024, supply costs will reduce even greater and labor costs, the same. The bigger horizon risk remains on the liability side and perhaps worker’s compensation due to COVID litigation. What happens in California will no doubt, have an impact nationwide. Some states and locales are reasonably well positioned with tort reforms in-place while others, are not, To date, absence precedent, COVID related litigation in the future, is unknown and unknowable.
Pastoral Care and Risk Management
In 2001, the Association for Professional Chaplains honored me with their Distinguished Service Award for my work in expanding the impact of professional chaplaincy and programs of pastoral care/ ministry in specialized healthcare settings. This was (and remains for me) a huge honor. Yet, since that time, a little over twenty years ago, programs of pastoral care, Clinical Pastoral Education, and chaplaincy are struggling for a concrete place in healthcare. Sadly, instead of watching these programs expand, I’ve seen contraction. Even more sad, I’ve watched geometric increases in management positions in risk management, etc., often while chaplaincy positions were eliminated.
Entering the “way back machine”, the core of my work which was recognized by the Association of Professional Chaplains, was that chaplaincy and programs of pastoral care make good business sense. The clear revenue picture isn’t present – I get it. The payback however, expressed as ROI via reduced risk, reduced litigation, improved employee retention, and patient satisfaction is enormous. One needs to however, understand and live, the work of chaplains in a healthcare setting to understand how the benefits are manifested.
I have literally sat in exceptionally contentious family meetings, dealing with issues of death and dying, where years of anger, hostility, sometimes abuse, come forward. The patient gets lost. Staff get frustrated and no common ground appears visible. In this midst, a professionally trained chaplain enters and when introduced, the dialogue begins to change. The issues remain but in short order, a sense of calm and a sense of order begins to emanate. The anger drops as the chaplain listens differently, redirects conversations, asks probative questions, and turns the focus to core beliefs and values. Ultimately, almost all important, life altering decisions have as their basis, a person’s core beliefs and values. Even for folk not identifiably religious or denominationally, spiritual tradition faithful, a series of beliefs and values can be found and from there, a decision framework can be built.
What we know about litigation risks, patient and staff, is that the desire to litigate is often born in a search for an answer. Something less desirable happened or questions posed, were not answered or the answers were obtuse. Healthcare of course, is not an exact science and bad things happen for no particular reason, even with adequate protections in place. For example, and I know this one well as my firm via my wife’s practice, handles complex litigation matters for defense counsel; old people fall. Save physical restraints, prohibited by law, old people will fall and sustain injury, sometimes that same leading to death or being associated with death. Falls beget lots of litigation in post-acute care yet, when the organization is heavily invested in pastoral care and the approach of the care team is “transdisciplinary” and the care coordinated, litigation risk can be minimized. I know, I’ve seen it in action.
Healthcare phraseology loves the words, multi-disciplinary or interdisciplinary. Pastoral care and care coordination done right (see yesterday’s post on care coordination here: https://wp.me/ptUlY-xO) is transdisciplinary. Transdisciplinary process and teams occur when roles are shared beyond traditional boundaries (removing the silo effect) and people collaborate among themselves beyond their specific discipline and restrictions. The patient becomes the center and his/her values and beliefs are the focal point for decisions and plans. Incorporating the patient’s key stakeholders into this process is where pastoral care has power and risks are reduced. Bad outcomes, if they occur, are no longer viewed as something to litigate as all along, the patient had clear value, the team was collaborating in the patient’s best interest, familial stakeholders were present, and the need to find flaw and extract some sort of retribution, diminished. Is it a perfect process? Of course not. Is it a process that better handles the ambiguities and the imperfections of healthcare outcomes, especially among the oldest with comorbidities and fragility? I believe it is and again, I’ve seen it work.
Among the defined dimensions of human care, spiritual care is a specific dimension. Providers need to address the physical, the emotional, the psychological, the social, and the spiritual dimension of human existence if care is to be complete. Staff have the same needs in many regards. As direct witness to suffering, grief and loss, the meaning of their work is often only reconciled spiritually. Their own feelings manifest in the milieu with the patient, the family and each other and they too, require care. An excellent White Paper, funded by Bristol-Myers Squibb covers the role of Chaplaincy in healthcare. Its link is here: https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=6a559606ee9814ea4e9b6a39f677ad9114dd7386
The role pastoral care plays in risk management is evident in literature as well but, the words risk management specifically, are not always present. Managing risk is about reducing negative outcomes or for patients and staff, dissatisfaction with what has occurred or is occurring. For example, in the journal Supportive Care in Cancer, an article titled, “Unmet spiritual needs impact emotional and spiritual well-being in advanced cancer patients”, the authors noted: When spiritual needs are not met, patients are at risk of depression and reduced sense of spiritual meaning and peace. Spiritual care should be matched to cancer patients’ needs. The risk management that is evident is the reduction of depression and an increase in a sense of peace. Reductions in frustration, sense of loss, anger, etc., all are reductions in risk and without question, lessened frustration begets better outcomes for patients and their loved ones and lower levels of litigation risk.
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