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The SNF 800 lb. Gorilla – Medicaid

There is an old joke/riddle that goes like this: “Where does an 800 lb. gorilla sit? Answer: Anywhere it wants to”. For SNFs and REITs today, that gorilla is Medicaid.  Sure, there are numerous industry headwinds that SNFs face in terms of financial performance;

  • Rising percentage of Medicare Advantage patients as part of the payer mix with implied discounts to fee-for-service of 10% or more.
  • Additional regulatory costs stemming primarily from the new Conditions of Participation, released in 2016.
  • Value-based purchasing.
  • Five Star system savvy referral managers that are steering volumes to certain providers
  • Rising labor costs, primarily at the lower end of the labor pool (CNA, food service, housekeepers, etc.) representing the 50th or more percentile of the SNF labor budget
  • Bundled payments in certain markets
  • Growing diversion of former non-complicated orthopedic patients away from IRFs and SNFs to home health and outpatient

Yet is spite of this list, not one or even a combination is as crippling as the impact of a high percentage of Medicaid patients within an SNF payer mix.

Take Genesis for example.  Genesis stock trades at just above $1.00 per share.  Genesis’ average payer-mix across its SNFs is 73% Medicaid.  This means that 27% of  the remaining payers must make-up for a negative break-even margin rate of no less than 30% for each Medicaid patient.  In some states, the disparity is greater.  In other states, the disparity might be less but the state budget woes delay payments or issue IOUs (Illinois) causing the SNF to finance its own below-cost receivables.  Recent news that Genesis may be the next significant REIT holding default is far from fantasy.

The seemingly large, formerly well-capitalized SNF chains are in peril.  HCR ManorCare is in default to HCP (its primary REIT) to the extent that HCP is seeking receivership for the HCR holdings.  The portfolio has a rent coverage ratio of .76x at the facility level and less than 1x globally.  Signature is in the same boat.  Both have compliance problems with Signature having so scarce a margin that it cannot adequately staff or provide for residents in certain locations such as Memphis (facility denied payment, residents relocated).  HCR faces federal Medicare fraud action(s) that will likely lead to settlement payments, etc. for over-billing in excess of $100 million.

Among these troubled SNF providers, one common thread persists – high average Medicaid census (above 66%) as the primary payer mix in their buildings.  With this high mix of Medicaid patients comes staggering facility level losses or revenue shortfalls that must be made-up by other payers.  Consider Wisconsin as an example.  Wisconsin is a state that maintains a balanced budget and generally, a surplus.  It has no issues paying its bills so SNFs do receive timely payment.  Wisconsin however, grossly underpays its SNFs for their Medicaid residents to the tune of an average of a daily loss of $60 per day in 2013.  Between 2013 and 2015, Wisconsin provided no Medicaid rate increase.  All tolled, Wisconsin facilities experienced a Medicaid loss in this period exceeding $300 million.  This gap is exceeded only by the states of New York and New Jersey.  In Wisconsin, the Medicaid loss for an average SNF patient is made up (if possible) by other payers.  That amount today is well over $100 per day, excluding the cost of an imputed bed tax.  As the average Medicaid census is 65%, 35% of all other payers must pay $100 more to cover the Medicaid loss, before any other margin is applied.

Doing the math: A 100 bed facility with 100 residents has 65 covered by Medicaid. The State pays $175 per day for each Medicaid resident, on average.  The Facility costs are $60 per day higher or $235 per day.  In total, the Medicaid loss per month then is $60 x 65 x 30 (30 day month) or $117,000.  To break-even for the month, the remaining 35 patients must pay $346.43 per day or $235 per day in facility costs plus and additional $111.43 per day to recoup the loss from the Medicaid census. This of course does not include any additional costs related to a bed tax or account for any margin.

While the example is illustrative, it is not an atypical story state to state, save the unique twists that are part of every state program.  For example, Kansas chose to convert its Medicaid program to a “managed” program (in 2014) believing it could run more efficiently, save dollars on administrative costs and still provide adequate reimbursement.  As most states, Kansas chose to “bid” its program to various third-party administrators (insurers such as United Healthcare).  Unlike most states, Kansas chose to convert its entire Medicaid program rather than take a phased-in approach.  For SNFs, this approach has been a disaster.  The bulk of Kansas Medicaid recipients are rural.  Enrollment has been a nightmare and qualification of eligibility even more so. None of the participating administrators were prepared and had systems in-place to qualify promptly, newly eligible residents.  The net is many SNFs face technical payment delays due to having to manage multiple payers plus, difficulty in getting approval for residents that are Medicaid “pending”.  Receivables in total and days in receivable have skyrocketed and the state has yet to make many facilities current or whole.  And, because rate is an issue as is the state budget, the bed tax was increased by $800 per bed, per year.  In doing so, any facility with less than a 50% Medicaid census loses money on the bed tax (additional rate generated by Medicaid less than the bed tax increase).

Where this issue resolves is not apparent.  Proposals from Congress to block grant Medicaid to the states almost universally conclude with Medicaid rate reductions for SNFs.  For some states such as Kansas and Missouri, the outlook is a nominal reduction of 2 to 3% (though this is hardly nominal for the SNFs) in Medicaid spending/support.  The reason?  Rates and program expenditures are meager and lean to begin with.  In Colorado and New Jersey, overall Medicaid spending would reduce by as much as 20% translating to a crippling rate reduction without any additional state support (added state funding).  Both states were Medicaid expansion states under the ACA.

As for the survival and fortune of the SNF industry, the outlook for certain segments and providers is rather bleak.  The Medicaid story does not come with additional dollars for rate support or spending – just the opposite.  While block grants may give states renewed opportunities for innovation, the costs that drive SNF spending are not within the purview of a state to change – namely regulation, capital and staff.  The greatest flexibility a state may have is to infuse additional dollars and spending into SNF diversion programs – namely Home and Community Based Services.  These programs are wonderful for certain levels of care needs but for those frail seniors that typify the long-term resident in a SNF today, they offer no hope or savings.  Like it or not, SNF care for some is very cost-effective and necessary due to the needs of the resident (multiple chronic health problems, lack of family and social supports, mental/cognitive impairments, etc.).

In a recent call with an investment analyst from a private equity group, I was asked if “all was lost” for the sector.  The answer I gave is “no” but for some, the ship is definitely taking on water and it may be too late to avoid sinking.  This is definitely true for HCR ManorCare and perhaps for Genesis.  The question today is the collateral damage that may inure to REITs and other investors.  In brief;

  • Facilities with Medicaid census in excess of 50% will find it exceptionally difficult to generate enough revenue via other sources to cover the Medicaid losses.  Medicare simply is not sufficient in patient volume or rate to offset the losses.
  • Reducing Medicaid occupancy is difficult and not quick.  States do not provide a clear-path for this process and federal regulations don’t allow facilities to simply shed residents because of inadequate payments.
  • Many of the facilities with large (proportionate) Medicaid census are older and typified by bed counts above 75, semi-private rooms, and to a large degree, deferred cosmetic and maintenance issues.  In short: they are below the current market expectation for a paying SNF customer.
  • Taking over the operations or acquiring a number of these facilities with high Medicaid census, doesn’t change the fortunes of the same, directly or quickly.  While fixed costs in the form of rent payments may reduce, the operational headwinds remain the same.  A new operator cannot simply transfer out, Medicaid patients.  Even with a bed reduction plan approved by the State, the SNF is responsible for each resident, relocation, etc.  This process if not fluid or inexpensive.  Changing payer mix is difficult, slow and while occurring, expensive.  Frankly, I have never seen the same done to a facility that was predominantly, Medicaid.
  • The market for these facilities is minimal at best. For REITs, expect valuation changes (negative) as the holding value current is based on acquisition cost and income valuation tied to higher rent multiples.  Clearly, with rent coverage levels below 1, re-basing and re-balancing is next (if not already starting).

August 21, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , | 4 Comments

Bundled Payment Hiatus….or, Demise?

Within the last few days, CMS/HHS sent a proposed rule to OMB (Office of Management and Budget) that would cancel the planned January 2018 roll-out of the (mandatory) cardiac and traumatic joint repair/replacement bundles.  Specifically, CMS was adding bypass and myocardial infarction DRGs to the BPCI (Bundled Payments for Care Improvement) along with DRGs pertaining to traumatic upper-femur fracture and related joint repair/replacement.  The original implementation date was March, then delayed to May, again delayed to October and then to January 2018.  Additionally, the proposed rule (text yet available) includes refinement proposals for the current mandatory CJR bundles (elective hip and knee replacements).  It is widely suspected that the mandatory nature of the CJR will revert to a voluntary program in 2018.

The question that begs current is this step a sign of hiatus for episodic payments or an all-out demise.  Consider the following;

  • The current head of HHS, Tom Price is a physician who has been anti the CMS Innovation Center’s approach to force-feeding providers, new payment methodologies.  While Price is on the record as favoring payment reform he is also adamant that the same needs to incorporate the industry stakeholders in greater number and length than what CMS has done to date (with the BPCI).
  • Evidence of true savings and care improvement has not occurred, at least to date.  This is definitely true of the large-scale initiatives.  The voluntary programs, in various phases, are demonstrating some success but wholesale success is simply not there or not yet confirmed by data.
  • Providers have railed against bundle complexity and in particular, the short-comings evident for cardiac DRGs which are inherently far more complex than the orthopedic DRGs, at least those that are non-traumatic.

My answer to the question is “hiatus” for quite some time.  While there is no question that value-based care and episodic payments are part of the go-forward reality for Medicare, timing is everything.  There are multiple policy issues at play including the fate of the ACA.  A ripple effect due to whatever occurs with the ACA (repeal, revamp, replace, etc.) will permeate Medicare (to what extent is yet to be determined). I anticipate the current voluntary programs to continue and CMS to return to the drawing board waiting for more data and greater clarity on “where to go” with respect to value-based care programs.

Finally, because bundled payments did have some implications for the post-acute sectors of health care, this possible change in direction will have an impact, albeit small. The cardiac bundles had little to no impact for SNFs or HHAs and only minor impact perhaps, for IRFs (Skilled Nursing, Home Health and Inpatient Rehab respectively).  Traumatic fractures and joint repair/replacement had some impact for inpatient providers, particularly Skilled and IRFs as rarely can these patients transition home or outpatient from the surgical stay.  Some inpatient care is customary and frankly, warranted.

CJR sun-setting may have some broader ramifications.  Right now, CJR has shifted the market dynamic away from a traditional SNF or IRF stay to home health and outpatient.  The results are evidenced by a fairly noticeable referral shift away from SNFs and concomitant Medicare census declines coupled with length of stay pressures (shorter).  Home health and outpatient has benefitted.  Yet to determine is whether this trend is ingrained and evidence of a new paradigm; one that may be permanent.  If the latter is the case, CJR shifting to a voluntary program may not change the current picture much, if any.  My prediction is that the market and the payers have moved to a new normal for voluntary joint replacements and as such, CJR or not, the movement away from inpatient stays and utilization is here to stay.

August 15, 2017 Posted by | Home Health, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

SNFs and Stranded Assets

Lately I’ve written rather extensively on what is occurring in the SNF sector to (rather) dramatically shift the fortunes for companies such as HCR/ManorCare, Kindred, Genesis, Signature, et.al. and a series of REITs that hold SNF assets (physical).  In addition to my writings, I’ve consulted/conversed with numerous investment firms concerned and interested in this shift.  Underlying all of my written thoughts and my discussions is a harsh reality check: A solid third of the industry today (SNF) has assets that I and other industry-watchers would consider/define as stranded.

I have embedded a link to a great article that covers the concept of “stranded assets”.  It is from the HFMA and the focus is on hospitals but the issues are directly analogous to SNF physical plants.  The link is here: http://www.hfma.org/Content.aspx?id=54453

The underlying issues that created this unique asset status are as follows.

  • An SNF physical plant has value if the corresponding cash flow generated from the operations attached to the asset is positive with a margin.  The HFMA hospital reference point is an EBITDA margin of 6% or higher.  Depending on the age of physical plant, deferred maintenance and interest and tax costs, 6% is likely a “non-coverage” situation.  For SNFs owned by REITs, we are seeing EBITDAR equal to a coverage ratio of 1 or less (cash to pay or cover rent costs).  I contend that in this scenario, the asset (SNF) plant is now stranded.
  • Stranded effectively means that the asset (the SNF) has no strategic or business value in the current state (with an EBITDAR coverage equal to 1 or less).  Without significant changes to operations to increase the cash coverage margin, the value of the asset is impaired and by GAAP, should be written down.  NOTE: I am not an accountant/CPA so I will leave any further reasoning or discussion on GAAP requirements, asset impairment and write-downs to the accountancy profession.
  • Important to note about assets/SNFs that are stranded is that short-term advances/improvements in their cash flow may change this status by definition but the same is only temporary.  The market, health policy and other  business shifts away from certain types of institutional care and lower-rated providers is permanent.  SNFs not properly positioned from an asset and operating perspective for these market changes will return to stranded status again and rather quickly.  The point here is this: An asset that is stranded is characterized by,
    • An aged physical plant with deferred maintenance
    • A plant that is not current in terms of market expectations (private rooms, open dining, bistro areas, coffee bars, exercise and therapy gyms, etc.)
    • A plant that is inefficient from a staff and resource perspective (too many units, too spread out, etc.)
    • An asset with operations that have a poor history of compliance, rated below 3 stars, and with marginal to sub-par quality measures.

Today, the strategic value of the asset is tied directly to its ability, along with paired operations, to generate positive cash margins sufficient to cover debt payments or lease payments plus required capital improvements (funded or sequentially incurred period over period). If an asset is truly stranded, changing that position is a strategic and long-term endeavor: An approach that requires wholesale repositioning.  For many SNFs, this approach may not be feasible.

  • The dollars required to reposition the asset from a physical plant perspective are greater in total than the remaining Undepreciated Replacement Value of the plant.  In other words, the cost to reposition is greater than the value of the asset.
  • The return generated from the repositioning is insufficient from an ROI perspective (less than the cost of capital plus the imputed life-cycle cost of depreciation of the improvements).
  • The operations of the asset are also impaired such that the compliance history and Star ratings, etc. are poor (historically) and changing the same would/will require a long-term horizon whereby, the same does not net cash flow improvement during the process.  Referrals and permanent cash-flow improvements are the result of revenue model changes and the same can not occur overnight when Star ratings and compliance improvements are required.  Changing Star ratings from a 3 to 4 for example, can take twelve months or longer.

The take-away points for the industry are simple.  The industry has an abundance of buildings/assets that fit the stranded definition today and a good number reside in REIT portfolios.  These assets/buildings, because of the points above, literally and figuratively, cannot be repositioned.  Their value has shrunk precipitously and there is nothing regarding the circumstances that caused this shift that will change.  Repositioning to avoid or change the stranded status is improbable due to the facts at-hand;

  • The asset is old by current business-need standards, has moderate to significant deferred maintenance issues and improvement to the current standard will cost in-excess of the undepreciated replacement value of the asset.
  • The operations tied to the asset are not highly rated, with strong compliance history and exceptional quality measure performance.
  • The operations and asset together, are incorrectly matched within a market that has higher rated competitors with better outcomes and newer, better positioned physical plants.  The preferred referrals for quality payers has moved to these competitors and the drivers such as bundled payments, value-based purchasing, Medicare Advantage plans, etc., plus a movement away from institutional care (to shorter stays, fewer stays) has altered the demand factors within the market.

In all probability, the above foreshadows a shrinking scenario combined with a valuation-shift (negative) for the SNF industry.

 

June 21, 2017 Posted by | Skilled Nursing | , , , , , , , , , , , | 2 Comments

SNF Fortunes, HCR/Manor Care and Salient Lessons in Health Care

Long title – actually shortened.  In honesty, I clipped it back from: SNF Fortunes, HCR/Manor Care, Five Star, Value-Based Payment, Hospitals Impacted Too, Home Health and Hospice Fortunes Rise, and all Other Salient Lessons for/in Health Care Today. Suffice to say, lots going on but almost all in the category of “should have seen it coming”.  For readers and followers of my site and my articles and presentations/speeches, etc., this theme of what is changing and why as well as the implications for the post-acute and general healthcare industry has been discussed in-depth.  Below is a short list (not exhaustive) of other articles I have written, etc. that might provide a good preface/background for this post.

Maybe a better title for this post is the question (abbreviated) that I am fielding daily (sometimes thrice): “What the Heck is Going On?” The answer that I give to investors, operators, analysts, policy folks, trade association folks, industry watchers, etc. is as follows (in no particular order) HCR/Manor Care: This could just as easily be Kindred or Signature or Genesis or Skilled Healthcare Group…and may very well be in the not too distant future.  It is, any group of facilities, regardless of affiliation, that have been/are reliant on a significant Medicare (fee for service) census, typified by a large Rehab RUG percentage at the Ultra High or Very High level with stable to longer lengths of stay to counterbalance a Medicaid census component that is around 50% of total occupancy.  The Medicaid component of census of course, generates negative margins offset by the Medicare margins.  For this group or sub-set of facilities in the SNF industry, a number of factors have piled-on, changing their fortune.

  • Medicaid rates have stayed stable or shrunk or state to state conversions to Managed Medicaid have slowed payments, added bureaucracy, impacted cash flows, etc.  This latter element in some states, has been cataclysmic (Kansas for example).
  • Managed Medicare has (aka Medicare Advantage plans) increased in terms of market share, shrinking the fee-for-service numbers.  These plans flat-out pay less and dictate which facilities patients use via network contracts.  They also dictate length of stay.  In some markets such as the Milwaukee (WI) metro market, almost 50% of the Medicare volume SNFs get is patients in a Medicare Advantage plan.
  • Value-Based Care/Impact Act/Care Coordination has descended along with bundled payments in and across every major metropolitan market in the U.S. (location of 80 plus percent of all SNFs).  This phenomenon/policy reality is dictating the referral markets, requiring hospitals to shift their volumes to SNFs that rate 4 Stars or higher. The risk of losing funds due to readmissions, etc. is too great and thus, hospitals are referring their volumes to preferred environments – those with the best ratings.  The typical HCR/Manor Care facility is 3 stars or less in most markets.
  •  Overall, institutional use of inpatient stays is declining, particularly for post-acute stays.  Non-complicated surgical procedures or straight-forward procedures (hip and knee replacements, certain cardiac procedures, other orthopedic, etc.) are being done either outpatient or with short inpatient hospital stays and then sent home – with home health or with continuing care scheduled in an outpatient setting.  Medicare Advantage has driven this trend somewhat but in general, the trend is also part of an ongoing cultural and expectation shift.  Patients simply prefer to be at home and the Home Health industry has upped its game accordingly.

Adding all of these factors together the picture is complete.  Summed up: Too much Medicaid, an overall reduction in Medicare volume, an overall reduction in length of stay, and a shift in the referral dynamics due to market forces and policy trends that are rewarding only the facilities with high Star ratings.  That is/will be the epitaph for Manor Care, Signature, etc.

Five Star/Value-Based Care Models, Etc.: While many operators and trade associations will say that the Five Star system is flawed (it is because it is government), doesn’t tell the full story, etc., it is the system that is out there.  And while it is flawed in many ways, it is still uniformly objective and its measures apply uniformly to all providers in the industry (flaws and all).  Today, it is being used to differentiate the players in any industry segment and in ways, many providers fail to realize.  For example, consumers are becoming more savvy and consumer based web-sites are referencing the Five Star ratings as a means for comparison.  Similarly, these same consumer sites are using QM (quality measure) data to illustrate decision-making options for prospective residents.  Medicare Advantage plans are using the Five Star system.  Hospitals and their discharge functions use them.  Narrow networks of providers such as ACOs are using them during and after formation.  Banks and lenders use the system today and I am now seeing insurance companies start to use the ratings as part of underwriting for risk pricing (premiums).  Summed up: Ratings are the harbinger of the future (and the present to a large extent) as a direct result of pay-for-performance and an ongoing shift to payments based on episodes of care and via or connected to, value-based care models (bundled payments, etc.).  Providers that are not rated 4 and 5 stars will see (or are seeing) their referrals change “negatively”.

Home Health and Hospice: The same set of policy and market dynamics that are adversely (for the most part) impacting institutional providers such as SNFs and hospitals is giving rise to the value of home health and hospice.  Both are cheaper and both fit the emerging paradigm of patients wanting options and the same being “home” options.  Hospice may be the most interesting player going forward.  I am starting to see a gentle trend toward hospices becoming extremely creative in their approach to developing non-hospice specific, delivery alternatives.  For example, disease management programs evolving within the home health realm focused on palliative models, including pain and symptom management.  Shifts away for payment specific to providers ala fee-for-service will/should be a boon for hospices.  The more payment systems switch to episode payments, bundled or other, the more opportunity there is for hospices to play in a broader environment, one that embraces their expertise, if they choose to become creative.  Without question, the move toward less institutional care, shorter stays, etc. will give rise to the home care (HHA and hospice) and outpatient segments of the industry.  As fee-for-service slowly dies and payments are less specific (post-acute) to place of care (institutional biased and located), these segments will flourish.

Hospitals Too: The shift to quality providers receiving the best payer mix and volume and payments based on episodes of care, etc. is impacting hospitals too.  This recent Modern Healthcare article highlights a Dallas hospital that is closing as a result of these market and policy dynamics: http://www.modernhealthcare.com/article/20170605/NEWS/170609952?utm_source=modernhealthcare&utm_medium=email&utm_content=20170605-NEWS-170609952&utm_campaign=dose

REITs, Valuations, M&A, and the Investment World: As we have seen with HCR/Manor Care and Signature (likely others soon), REITs that hold significant numbers of these SNF assets have a problem.  These companies (SNF) can no longer make their lease payments.  Renegotiation is an option but in the case of Signature, the coverage levels are already at 1 (EBITDAR is 1 to the lease obligation).  IF and I should say when, the cash pressure mounts just a bit more, the coverage levels will need to fall below 1.  This significantly impacts the REITs earnings AND changes the valuation profile of the assets held.  What is occurring is their portfolio values are being “crammed” down and the Return on Assets negatively impacted.  And for the more troubling news: there is no fluid market today to offload underperforming SNF assets.  Most of the Manor Care portfolio, like the Genesis and Skilled Healthcare and Kindred portfolios, is facilities that are;

  • Older assets – average age of plant greater than 20 years and facilities that were built, 40 years or more ago.  These assets are very institutional, large buildings, some with three and four bed wards, not enough private rooms and even when converted to all private rooms, with occupancy greater than 80 or so beds with still, very inefficient environments.  Because so few of these assets have had major investments over the years and the cash flow from them is nearing negative, their value is negligible.  There are not buyers for these assets or operators today that wish to take over leases within troubled buildings with high Medicaid, low and shrinking Medicare, compliance (negative) history, etc.  Finally, the cost to retrofit these buildings to the new paradigm is so heavy that the Return on Investment (improved cash earnings) is negative.
  • Three Star rated or less with fairly significant compliance challenges in terms of survey history.  Star ratings are not easy to raise especially if the drag is due to survey/compliance history.  This Star (survey) is based on a three-year history.  Raising it just one Star level may take two to three survey cycles (today that is 24 to 36 months).  In that time, the market has settled again and referral patterns concretized – away from the lower rated providers.
  • In the case of Manor Care, too many remain or are embroiled or subject to Federal Fraud investigations.  While no one building is typically (or at all) the center of the issue, the overhang of a Federal investigation based on billing or care impropriety negatively impacts all facilities in terms of reputation, position, etc.

As “deal” volumes have shrunk, valuations on SNF assets are getting funky (very technical term).  The deals that are being done today are for high quality assets with good cash flow, newer buildings or even speculative deals on buildings with no cash flow (developer built) but brand-new buildings in good market locations.  These deals are purchase and operations (lease to operators and/or purchased for owner operation).  Cap rates on these deals are solid and range in the 10 to 12 area.  Virtually all other deals for lesser assets, etc. have dried up.

Final Words/Lessons Learned (or for some, Learning the Hard Way): As I have written and said ad nausea, the fee-for-service world is ending and won’t return.  Maximizing revenue via a focal opportunity to expand census by a payer source, disconnected from quality or services required, is a defunct, extinct strategy. That writing was on the wall years ago.  Today is all about efficient, shorter inpatient stay, care coordination, management of outcomes and resources and quality.  The only value provider assets have is if they can or are, corollary to these metrics.  By this I mean, an SNF that is Five Stars with modern assets and a good location within a strong market has value as does the operator of the asset.  An SNF that is Two Stars with an older building, a history of compliance problems, regardless of location, 50 percent Medicaid occupied has virtually no value today…or in the future.  Providers that can network or have an integrated continuum (all of the post-acute pieces) are winning and will win, especially if the pieces are highly rated.  Moreover, providers that can demonstrate high degrees of patient satisfaction, low readmission rates, great outcomes and shorter lengths of stay are and will be prized.  The world today is about tangible, measurable outcomes tied to cost and quality.  There is no point of return or going back.  And here’s the biggest lesson: The train has already left the station so for many, getting on is nearly impossible.

June 14, 2017 Posted by | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

SNF Outlook, REITs, Kindred and Where to From Here

As the title of this post implies, a review of the status of the SNF industry is as much about current issues begat by past issues influenced by an outlook that is finally, starting to congeal.  Writing that (sentence) was convoluted enough and that is exactly, where the bulk of the industry issues are.  To begin, an operative “influences” framework is required.

  • Federal Conditions of Participation: After years of work and inaction, a final rule updating the Federal Conditions of Participation was released in September of 2016.  These Conditions haven’t updated (substantively) since the early 90s via implementation of OBRA and PPS.  Suffice to say, the update is sweeping; so much so that implementation of the revisions is in year over year phases.  Complying with all of the Conditions will cost SNFs tens of thousands of dollars, if not more.  Implementation and survey activity on the new Conditions begins November 2017.  Reference posts from this site are here: http://wp.me/ptUlY-kL    http://wp.me/ptUlY-kU    http://wp.me/ptUlY-lf
  • Value-Based Purchasing: Pay for performance is coming (or almost here) as the measurement period for SNFs has occurred and the timeframe for making improvements in performance, particularly on avoidable readmissions is NOW.  For SNFs, this is about reducing or eliminating, avoidable hospital readmissions (within 30 days of SNF admission from a hospital).  The observation period has already concluded for payment adjustments (negative to positive), beginning in 2018.  The initial adjustment is 3% ranging to 8% in 2022.
  • IMPACT Act and QRP: This is all about the reporting of quality data and quality measures across all post-acute settings.  The implication for SNFs is the disclosure of these measures, tethered to a benchmark.  Performance below (the measurement period is past), the SNF is encouraged to improve to the benchmark.  Failure to improve nets a 2% reduction in Medicare payments.  High performers will receive an incentive payment.  Specifics are here:  http://wp.me/ptUlY-lx
  • Bundled Payments: Elective Hip and Knee replacement is up and running in 67 metropolitan regions.  In bundled payments, providers acute and post-acute are essentially paid based on an episode of care.  The episode is a benchmark for the region and provider costs based on billed charges, matched against the target.  Additionally, providers are tasked with quality measurements and satisfaction measurements.  The goal is to produce outcomes that are lower in cost than the benchmark  and at or above, desired quality levels.  Providers (hospitals initially) that can do so, will receive incentive payments.  The implication for SNFs is the need to control costs, provide high quality outcomes and potentially, participate in risk-sharing agreements with the hospital for a piece of the incentive “action”.  Cardiac and upper femur fracture bundled payments set to begin March 1 of this year are delayed to October 1.  More on this subject here: http://wp.me/ptUlY-k2  http://wp.me/ptUlY-kv
  • Star Ratings: Because of the issues above, mostly influenced by Bundled Payments and readmission penalties for hospitals, Star ratings (the CMS Five Star system) matter.  Providers that have lower Star ratings (3 or less) are watching referrals for quality paying patients (primarily Medicare) dwindle.  In some cases, in markets with ample 4 and 5 Star providers, referrals patters have shifted by as much as 30% (away from 3 Star and lower facilities).
  • Market and Referral Shifts: Without question, there is a distinct movement away from institutional post-acute care.  In some markets, an abundance of SNF beds has led to an overall reduction of ten plus points in average occupancy (supply exceeding demand).  Home health is the biggest benefactor as patients previously sent to SNFs for lengthy rehab stays have shifted to home health for the entire stay or for the back-half or better of the traditional stay.  This has hurt occupancy.  Couple this effect with the issues noted before and market and referral pressures are enormous for many SNFs.  A five to seven point reduction in the quality mix occupancy is enough to erode margins from negative to positive.  With increasing cost pressure due to the new Conditions of Participation, et.al., and limited revenue increases due to rate, the fortune for many SNFs is dim.
  • Possible New Payment System for Medicare: Within the past week, CMS floated a proposed rule for comment that would “gut” the current RUGs system, replacing it with a Resident Classification System.  The overall theme is to reduce the reward tied to maximizing therapy services and length of stay.  The new system would categorize residents based on overall needs, combine reimbursement for PT and OT and enhance payment for nursing related needs.  More to come on this topic.

With the above headwinds, none of which are all that new or “newsworthy”, the industry is quaking or trembling or at least fifty plus percent is.  Consider the following as reasons;

  • Medicaid remains the dominant payer for skilled nursing care.  With the likelihood of continued rate pressure state by state for providers (Medicaid structural funding issues), the prospect of enhanced payment now or in the near future is ZERO. Fifty plus percent of the SNFs in the industry have a census that is predominantly, Medicaid (50 plus percent).  The net Medicaid margin (negative) for most providers is 20%. For higher quality providers, the margin (negative) is 30%.
  • The make-whole relief has come from Medicare and to a lesser extent, private pay.  In effect, providers have subsidized their Medicaid losses via Medicare.  The loss offset plus margin has come from maximizing Medicare census and Medicare reimbursement, via higher therapy utilization and length of stay.  The net difference per patient day between Medicare and Medicaid (on average) is $275 per day (varies state to state).  For most providers with large Medicaid census, a Medicare day is worth 1.7 Medicaid days (one Medicare is 1.7 times more “revenue” valuable than a Medicaid day).  Illustrated a bit more: A 100 bed facility with 50 Medicaid needs 29.4 Medicare residents to offset the Medicaid loss.  Add a few private pay, and a margin is possible.
  • With VBP, QRP, bundled payments and census pressure, the ability to attract the Medicare volume to offset the Medicaid losses for a growing number of facilities has eroded.  Facilities at or below the 3 Star level in most major metropolitan markets are seeing referral “shrinkage” and thus, census reductions.  The effect is directly on the Medicare census.
  • The outlook as result of new Conditions of Participation is for steadily rising costs to comply, at least in the short to near term.  New regulations drive costs up.
  • A future that includes a payment system overhaul focused less on therapy and RUGs maximization, more on classifying residents’ needs globally, foretells great peril for the sector of the industry that has relied heavily on maximizing therapy volumes and related RUGs as margin subsidy.  These SNFs need a new revenue and business model and time for the same is not on their side.

Given the above and the factors operative, it is no wonder Kindred has decided to abandon the SNF market and potentially, explore a sale for their entire business.  The Kindred reality is/was for their SNF business, a portfolio heavily occupied by Medicaid, facilities with aged, inefficient and out-scale physical plants, so-so market locations, and virtually all subject to leases to Ventas and other REITs.  Combine these factors with an average Star rating at 3 or lower (not a lot of 4 and 5 star facilities) and the outlook is challenging.   There simply was and is, no business justification to invest millions upon millions of dollars (literally hundreds of millions likely) to upgrade physical plants (plants that were too old and improperly scaled) and to embark on a census development and Star improvement strategy, none of which will/would bear fruit for at least 5 years if not more. And of course, the fruit that is produced is insufficient in net margin to justify the original expenditure and meet ROI (Return on Investment) requirements.

The Kindred news that it may seek a sale of the entire business is a strategic, preemptive hedge to what has occurred (is occurring) to Brookdale. The parts of Kindred in certain cases may be worth more than the whole.  Overall, the revenue pressure (down) on the post-acute industry is heavy with the heaviest pressure set to bear on institutional providers; particularly those with aged and improperly positioned/scoped assets.  Revitalizing these assets is expensive, in some cases more so than rebuilding the asset properly, in its entirety.  In short, Kindred is asset wealthy but the cash flow future from the heavy institutional element is marginally poor.

Transitioning to REITs that hold large SNF portfolios, the same or an analogous picture is operative.  The bulk of REIT holdings are three Star and lower.  Quality mix has eroded for these facilities along with census.  As cash flow pressure has increased, the  need has arisen to restructure lease payments (lower).  Lower lease payments reduce REIT earnings.  Without a large volume of facilities that are four and five Star, there simply is no place to shift rate and thus, earnings pressure.  Four and five Star facilities can and generally do, have enough cash flow to pay leases with coverage ratios at 1.2 and better.  Below the three Star level, the pressure today is for leases to move to 1.1 or 1 – not a good future for a REIT’s earnings.

A concomitant problem for REITs is the value decline of the SNF assets they hold.  While industry Cap rates have been decent, the deal volume is very small and the deals done, cash flow focused – typified by four and five Star rated providers or newer assets.  REIT assets tend to be older buildings, larger buildings and parts of chain or system organizations such as LifeCare and Manor Care.  Simply stated: Without a quality mix, strong cash flow, good market location and solid to better assets (not too large, primarily private room, modern, etc.), the underlying brick and mortar value is minimal.  There are not buyers today for these types of assets and the operators willing to assume these assets with leases are disappearing as well.

Given all of these issues, challenges, etc., one could surmise an outlook for the SNF industry that is rather bearish.  My view is a bit bifurcated.  For a large portion of the industry, I am bearish;

  • Older physical plant that is larger, not fundamentally all private rooms, inefficient to staff, not having modern dining and therapy space, etc.
  • Rated at three Stars or less
  • Medicaid census at 40 percent or higher of total bed capacity
  • Debt or lease payments greater than 20% of net revenue
  • In rural locations, unaffiliated with a larger parent or provider organization (staffing is difficult at best)

For providers that don’t fit this profile, there is a decent future if they stay ahead of the trends.  Consider the following;

  • Quality referrals are migrating aggressively to four and five Star providers
  • Payment incentives for strong quality outcomes are forthcoming (next year to three)
  • In good market locations, these providers will be able to negotiate terms in narrow networks and with Medicare Advantage plans as the other providers fall-off.
  • Properly capitalized with a good capital structure and cash flow sufficient to keep physical plant from aging (depreciating) via proper maintenance and investment

Granted, the number of providers that meet this profile is not large in number and almost entirely today, non-profit, health system affiliated or regional, privately held.  The real challenge is to be nimble and constantly vigilant on quality.  The movement as I have written and publicly stated in speeches and lectures, is to pay only for high quality and efficiently determined outcomes.  Providers that can deliver this level of care will succeed and win in the new “environment”.  Those that aren’t at this level yet have likely, run out of time.  Three Star or lower ratings take a long time today to convert to four and five Stars.  By the time the conversion has occurred, the referral patterns in the market will have permanently changed.

May 4, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , | 1 Comment

Health Systems, Hospitals and Post-Acute Providers: Making Integration Work

Early into the Trump presidency and health care/health policy is front and center.  The first “Obamacare repeal and replace” attempt crashed and burned.  The upcoming roll-out of the next round of bundled payments (cardiac and femur fracture) is delayed to October from the end-of-March target date.  Logically, one can question is a landscape shift forming? Doubtful.  Too many current realities such as the need to slow spending growth plus find new and innovative population health and payment models are still looming. These policy realities beget other realities. One such reality is that hospitals and health systems must find ways to partner with and integrate with, the post-acute provider industry.

In late 2016, Premier, Inc. (the national health care improvement organization) released the results of a study indicating that 85% of health system leaders were interested in creating expanded affiliations with post-acute providers.  Interestingly, 90% of the same group said they believed challenges to do so would exist (Premier conducted the survey in summer of 2016 via 52 C-suite, health system executives).  Most of the challenges?  The gaps that exist “known and unknown” between both provider segments (acute and post-acute) and the lack of efficient communication interfaces (software) between the segments.

On the surface, bundled payments notwithstanding, the push for enhanced integration is driven by a number of subtle but tactile market and economic shifts.

  1. Inpatient hospital lengths of stay are dropping, driven by an increasing number of patients covered by managed care.  Today, the largest payer source contributor of inpatient days, Medicare, is 30.6% “managed”…and growing.  Medicaid is 62.7% and commercial, nearly 100% (99%). Source: http://www.mcol.com/managed_care_penetration
  2. Payment at the hospital end is increasingly tied to discharge experience – what happens after the inpatient stay.  The onus today is on the hospital (and growing) for increasing numbers of patient types (DRG correlated) to discharge the patient properly such that the same does not beget a readmission to the hospital.  Too many readmissions equal payment reductions.
  3. Population health, focused-care models such as ACOs are evolving.  Their evolution is all about finding the lowest cost, highest quality centers of care.  Other BPCI (bundled payment) initiative projects such as Model 3, focus directly on the post-acute segment of care.  Unlike CJR (and the recently delayed cardiac bundles), the BPCI demonstration that began in 2013 covers 48 episodes of care (DRG based) and has participating providers (voluntarily) operating programs in all four model phases, nationwide.
  4. Patient preference continues to demand more care opportunities at-home.  Never mind the increased risk of complication with longer inpatient hospital stays (the risk of infection, pressure injuries, weight loss, delirium, etc. increases as stays increase), it is patient preference to discharge quickly and preferably, to home with services (aka home care).

Regardless the fate of Obamacare now or in the near future, these trends are unlikely to change as they have been moving separate from Obamacare.  Arguably, the ACA/Obamacare accelerated some of them.  Nonetheless, the baked-in market forces that have emanated from ACOs and care episode payments illustrate that even in infancy, these different models produce (generally) more efficient care, lower costs and improved patient satisfaction and outcomes.

As with any integration approach such as a merger for example, cultural differences are key.  The culture of post-acute care is markedly different from that of acute/hospital care.  For hospitals to appreciate this difference, look no farther than the two key determinants of post-acute culture: regulation and payment.  The depth and breadth plus the scope of survey and enforcement activity is substantially greater on the post-acute side than the acute side.  As an example, observe the SNF industry and how enforcement occurs.  Hospitals are surveyed for re-accreditation once every three years.  The typical SNF is visited no less than four times annually: annual certification and three complaint surveys.

In terms of payment, the scope is drastically different.  While hospitals struggle to manage far more payers than a post-acute provider, the amount that is paid to a hospital is substantially larger than that paid to a post-acute provider.  At one point years back, the differences were substantiated largely by acuity differences across patients.  While a gap still exists, it has narrowed substantially with the post-acute provider world seeing an increase in acuity yet lacking a concomitant payment that matches this increase.

Given this cultural framework, post-acute providers can struggle with translating hospital expectations and of course, vice-versa.  Point-of-fact, there is no real regulatory framework in an SNF under federal law for “post-acute” patients.  The rules are identical for a patient admitted for a short-stay or for the rest of his/her life.  Despite the fact that the bulk of SNF admissions today are of the post-acute variety, the regulations create conformity for residency, presumptively for the long-term.  Taking the following into consideration, a challenge such as minimizing a post-acute SNF stay to eight days for a knee replacement (given by a hospital to an SNF) is logical but potentially fraught with the peril presented by the federal SNF Conditions of Participation.  The SNF cannot dictate discharge.  A patient/resident that wishes to remain has rights under the law and a series of appeal opportunities, etc. that can slow the process to a crawl.  At minimum, a dozen or more such landmines exist in analogous scenarios.

Making integration work between post-acute and acute providers is a process of identifying the “gaps” between the two worlds and then developing systems and education that bridge such gaps. Below is my list (experiential) of the gaps and some brief notes/comments on what to do bridge the same.  NOTE: This list is generally applicable regardless of provider type (e.g., SNF, HHA, etc.).

  • Information Tech/Compatibility: True interoperability does not yet exist.  Sharing information can be daunting, especially at the level required between the provider segments for good care coordination.  The simple facts are that the two worlds are quite different in terms of paper work, billing requirements, documentation, etc.  Focus on the stuff that truly matters such as assessments, diagnoses, physician notes, plans of care, treatment records, medications, diagnostics, patient advance directives and demographics.  Most critical is to tie information for treating physicians so that duplication is avoided, if possible.
  • Regulatory Frameworks: This is most critical, hospital/physician side to the post-acute side, less so the other way.  Earlier I mentioned just one element regarding an SNF and discharge.  There are literally, dozens more.  I often hear hospitals frustrated by HHAs and SNFs regarding the “rules” for accepting patients and what can/cannot be done in terms of physician orders, how fast, etc. For example, it might be OK in the hospital to provide “Seroquel for sleep or inpatient delirium” but it is not OK in the SNF.  HHAs need physician face-to-face encounters just to begin to get care moving, including orders for DME, etc.  There is no short-cut.  Creating a pathway for the discharging hospital and the physician components to and through the post-acute realm is critical to keep stays short and outcomes high… as well as minimize delays in care and readmissions.
  • Resource Differences: Understanding the resource capacities of post-acute, including payment, is necessary for smooth integration.  What this means is that the acute and physician world needs to recognize that stay minimization is important but so is overall care minimization or better, simplification.  Unnecessary care via duplicative or unnecessary medications, tests, etc. can easily eat away at the meager margins that are operative for SNFs and HHAs.  For example, I have seen all too many times where a patient has an infection and is discharged to an SNF on a Vancomycin IV with orders for continued treatment for four more days.  Those four days are likely negative margin for the SNF.  A better alternative?  If possible, a less expensive antibiotic or send the remaining Vancomycin doses to the SNF.  Too many tests, too many medications, too much redundancy erodes post-acute margin quickly.  Finding common ground between providers with shared resource opportunities is important for both segments to achieve efficiency and still provide optimal care.
  • Language Differences: In this case, I don’t mean dialect.  Industry jargon and references are different.  I often recommend cheat-sheets between providers just to make sure that everyone can have a “hospital to SNF to HHA” dictionary.  Trust me, there is enough difference to make a simple working dictionary worth the effort.
  • Education/Knowledge: The gap between staff working in different environments can be wide, particularly as the same relates to how and why things are done the way they are.  For example, therapy.  Physical therapy in a hospital for the acute stay is markedly different than the physical therapy in a home health setting or a SNF setting.  Care planning is different, treatments similar but session length and documentation requirements are vastly different.  The clinical elements are surprisingly similar but the implementation elements, markedly different.  The notion that one staff level is clinically superior to another is long dispelled.  SNF nurses can face as many clinical challenges and perhaps more due to no/minimal immediate physician coverage, as a hospital nurse.  True, there are specialty differences (CCU, Neuro ICU, Trauma, etc.) but at the level where patients flow through acute to post-acute, the clinical elements are very similar.  The aspect of care differences and the how and why certain things are done in certain settings is where interpretation and education is required.
  • System and Care Delivery: While the diagnosis may follow, assuring proper integration among the various levels or elements of care requires systematic care delivery. The best language: clinical pathways and algorithms.  Developing these across settings for an episode of care creates a recipe or roadmap that minimizes redundancy, misinterpretation, and lack of preparation (all of which create bad outcomes).  With these in-place, common acute admissions that beget post-acute discharges, places every care aspect within the same “playbook”.

 

March 28, 2017 Posted by | Home Health, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , , | 2 Comments

Five-Star Quality Rating Guide

A new book was just released – The Five-Star Quality Rating System Technical Users’ Guide.  Readers may find this resource exceptionally valuable, particularly in-light of how important the Five Star system is today (Value Based Purchasing, Quality Reporting, Bundled Payments, Network participation/formation, etc.).  For disclosure purposes, I am co-author along with Maureen McCarthy, RN.  The link to purchase/learn more about the book is below.

http://hcmarketplace.com/five-star-quality-rating-system-tech-user-guide?code=EB333371&utm_source=mktg&utm_medium=eml&utm_content=FSQRSTUG&utm_campaign=eml_LTC_EB333371_022717&spMailingID=10503291&spUserID=MTY3ODg3NjkxMzk3S0&spJobID=1101986339&spReportId=MTEwMTk4NjMzOQS2

 

February 27, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , | Leave a comment

IMPACT Act, VBP, Care Coordination and the SNF Landscape

Now into February, its time to take stock of the Post-Acute/SNF landscape, particularly as the same pertains to the evolutionary policy initiatives in-play and moving forward.  To start, there is little evidence on the horizon of an all-out retreat on the policy changes begat by the ACA.  While some framework is building to “Repeal and Replace” the ACA/Obamacare, the same will leave fundamentally intact, the changes started and wrought by Bundled Payments, Value-Based Purchasing, and the IMPACT Act.  The Republican majority, a smattering of Democrats, and the incoming Secretary of HHS have signaled support for these initiatives.  Should a Repeal strategy move forward any time soon, these elements, skeletal perhaps or whole in-flesh, will likely remain.

Reviewing thematically, these policy initiatives are centered on an intentional focal shift from episodic, fee-for-service payments to payments based upon performance.  Performance in each element is tied to cost and quality.  The objective is to create better outcomes (quality) in a more efficient manner.  Because these things are government policy, they are clunky – less than simple.  In some cases such as with Value Based Purchasing and readmission measures, the methodology is so cumbersome and disjointed (some diagnoses are OK, some are not) that a layman, even one well-educated, could have a hard time qualifying and quantifying an appropriate readmission (by diagnoses, by risk, etc.).

Below is a quick review of the current policy initiatives and what they mean for 2017 for SNFs.

IMPACT Act: The purpose of the Act is to create standardized reporting of quality measures and cost measures across the post-acute domain (HHAs, SNFs, LTCaH, IRF).  The objectives are to reduce avoidable readmissions to acute care settings and to create standardized, comparable quality measures to identify federal policy improvements and payment consistencies.  CMS of course, uses more floral language regarding the objectives and intent.  Ultimately, the translation of the standardized data allows CMS to target regulatory changes and payment initiatives that reward provider performance and streamline (a bit oxymoronic for government) payment systems (rate equalization models).  Below are the pertinent domains under the IMPACT Act

Quality Measures

  • Skin integrity and changes in skin integrity
  • Functional status, cognitive function, and changes in function and cognitive function
  • Medication reconciliation
  • Incidence of major falls
  • Transfer of health information and care preferences when an individual transitions

Resource Use and Other Measures

  • Resource use measures, including total estimated Medicare spending per beneficiary
  • Discharge to community
  • All-condition risk-adjusted potentially preventable hospital readmissions rates

Assessments

  • Functional status
  • Cognitive function and mental status
  • Special services, treatments, and interventions
  • Medical conditions and co-morbidities
  • Impairments
  • Other categories required by the Secretary

As is common in current health policy, reimbursement policy and other policy interweaves with laws such as the IMPACT Act.  Value Based Purchasing and  Quality Reporting for SNFs, integrates quality measure reporting and results along with readmission performance with incentives or penalties imputed via Medicare reimbursement for 2018.  Beginning in October of 2016, SNFs began to submit QRP (Quality Reporting) data via the MDS.  The first data collection period concluded on 12/31/16.  The Quality Measures reported and applicable under the IMPACT Act (cross setting measures) are:

  • Part A stays with one or more falls with major injury (fracture, joint dislocation, concussion, etc.)
  • Percent of residents with new or worsened pressure injuries
  • Percent of Long-Term Care Hospital patients with an Admission and Discharge Functional Assessment and a Care Plan that addresses function

The Claims Measures are:

  • Discharge to community
  • Potential preventable, 30 day post SNF discharge, readmission to hospital events
  • SNF Medicare spending per beneficiary

The Quality Measures are the elements that impute, based on performance, a reimbursement penalty in 2018 up to 2% of Medicare payments via a reduction in the SNFs reimbursement (rate) update.

Value Based Purchasing (VBP): SNFs are a tad late to this party as other providers such as hospitals, physicians and home health agencies already have reporting and measurement elements impacting their reimbursement.  Hospitals for example, have DRG specific readmission penalties (penalties applicable to common admitting diagnoses).  For HHAs, a nine state demonstration project is under way linking a series of measures (process, outcomes, claims) from the OASIS with customer satisfaction from the HHCAHPS to reimbursement via an accumulation tied to a Total Performance Score.  The measurement years (data gathered) beget payment changes (plus or minus) in outlying years – 2016 data nets payment adjustments in 2018.  The payment graduation increases over time (2018 = 3%, 2022 = 8%).

For SNFs, the VBP measure is 30 day, all cause, unplanned readmissions to a hospital. The measurement reflects a 30 day window that begins at the point of SNF admission from a hospital.  The 30 day window of measurement spans place of care meaning that the patient need not reside in the SNF for this measurement to still have an impact.  For example, a patient admitted to an SNF, subsequently discharged after 14 days to a HHA and then  readmitted to the hospital on day 22 (post hospital discharge) is considered a “readmission” for SNF VBP purposes.  CMS has offered guidance here regarding diagnoses that are excluded from the readmission measure.  Readers that wish this additional information can contact me via my email (on the Author page of this site) or via a comment to this post.  In either case, please provide a valid email that I can use to forward the information.

To avoid getting too technical in this post, a quick summary of how VBP will work is below (readers with greater interest can contact me as provided above for a copy of a Client Alert our/my firm produced last fall on VBP).

  • A SNFs readmission rate is calculated in separate calendar year periods – 2015 and 2017.  The 30 day readmissions (rate) applicable to an SNF is subtracted from the number 1 to achieve the SNFRM (Skilled Nursing Facility Readmission Measure).
  • The 2015 rate is called the Improvement Score and the 2017 rate is called the Performance Score.  Both scores are compared against a benchmark for the period applicable.
  • The benchmark equals 100 points.  The difference between the two (Improvement and Achievement) correlate to points plotted on a range – the Achievement range and the Improvement range.  The higher of the two scores is used to calculate reimbursement incentives or withholds – performance score.
  • Performance scores in terms of points correlate to reimbursement incentives/ withhold.  The maximum reduction or withhold is 2%.  CMS has yet to identify the incentive amount but under law, the amount must be equal in total value to 50-70% of the total withheld.  In effect, we envision a system that imputes a floor of minus 2% with points up to the threshold limit equaling a net of zero (plus 2%) and then climbing above the threshold to the benchmark (national SNF best readmission (average) decile).  This maximum level (and above) is likely to equal 100% of the available incentive.

The 2015 data is already “baked” but 2017 is just beginning. SNFs need to be diligent on monitoring their readmissions as this window is the Improvement opportunity.  Reimbursement impact isn’t until 2019.

Care Coordination: This catch-all phrase is now in “vogue” thanks to the IMPACT Act and VBP, along with the recently released, new Conditions of Participation.  The implication or applicability for Care Coordination is found in the new COPs.  Care Coordination elements are located in 483.21 (a new section) titled Comprehensive Resident-Centered Care Plans.  Specifically, the references to  Discharge Planning (Care Coordination) in this section are implementation elements for the IMPACT Act requirements.  Below are the regulation elements for Care Coordination.

  • Requires documentation in the care plan of the resident’s goals for admission, assessment of discharge potential and discharge plan as applicable
  • Requires the resident’s discharge summary to include medication reconciliation of discharge meds to admission meds (including OTC)
  • Discharge plan must incorporate  a summary of arrangements for post-discharge care including medical and non-medical services plus place of residence
  • All policies pertaining to admission, transfer, discharge, etc. must be uniform, regardless of payer source
  • Requires the facility to provide to resident/resident’s representative, data from IMPACT Act quality measures to assist in decision-making regarding selection of post-acute providers

The above elements are in Phase 1 meaning providers should be in-compliance by now (regulation took effect 11/28/16).

February 15, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , , , | 2 Comments

SNF M&A: The Provider Number Trap

Over my career, I have done a fair amount of M&A work….CCRCs, SNFs, HHAs, Physician practices, hospice, etc. While each “deal” has lots of nuances, issues, etc. none can be as confusing or as tricky to navigate as the federal payer issues; specifically, the provider number.  For SNFs, HHAs, and hospices, an acquisition not properly vetted and structured can bite extremely hard post-closing, if provider liabilities existed pre-close and were unknown and/or unknowable.  Even the best due diligence cannot ferret out certain provider number related liabilities.

The Medicare provider number is the unique reference number assigned to each participating provider.  When initially originating as a provider, the organization must apply for provider status, await some form of accreditation (for SNFs it is via a state survey and for HHAs and hospice, via private accreditation) and then ultimate approval by Medicare/DHHS.  As long as the provider that has obtained the number, remains in good standing with CMS (hasn’t had its provider status/agreement revoked), the provider may participate in and bill, Medicare and Medicaid (as applicable).

Provider numbers are assignable under change of control, providing the assuming party is eligible to participate in the Medicare program (not banned, etc.).  Change of control requires change of ownership or control at the PROVIDER level, not the facility or building level.  The building in the case of an SNF, is not the PROVIDER – the operator of the SNF is.  For example, if Acme SNF is owned and operated by Acme, Inc., then Acme, Inc. is the Provider so long as the SNF license in Acme’s state is to Acme, Inc.  Say Acme decides to sell the SNF property to Beta REIT and in turn, Beta leases the facility back to Acme.  Acme no longer owns the building but remains the Provider as it continues to hold the license, etc. consistent with the operations of the SNF.  Carrying this one step further.  Acme decides it no longer wants to run the SNF but wishes to keep the building.  It finds Zeta, LLC, an SNF management/operating company, to operate the SNF and leases the operations to Zeta.  Zeta receives a license from the state for the SNF and now Zeta is the PROVIDER, even though Acme, Inc. continues to own the building.

In the example above regarding Zeta, the typical process in such a change of control involving the operations of a SNF is for Zeta to assume the provider number of Acme.  The paperwork filed with CMS is minimal and occurs concurrent to the closing creating change of control (sale, lease, etc.).  What Zeta has done is avoid a lengthier, more arduous process of obtaining a new provider number, leaving Acme’s number with Acme and applying as a new provider at the Acme SNF location. While taking this route seems appealing and quick, doing so comes with potential peril and today, the peril is expansive and perhaps, business altering.

When a provider assumes the provider number of another entity at change of control, the new provider assumes all of the former provider’s related liabilities, etc. attached to the number.  CMS does not remove history or “cleanse” the former provider’s history. The etc. today is the most often overlooked;

  • Star ratings
  • Quality measures including readmission history
  • Claim error rate
  • MDS data (submitted)
  • Federal survey history
  • Open ADRs
  • Open or pending, probes and RAC audits

The above is in addition to, any payments owed to the Federal government and any fines, forfeitures, penalties, etc.  The largest liability is or relates to, the False Claims Act and/or allegations of fraud.  These events likely preceded the change of control by quite a distance and are either impossible to know at change of control or discoverable with only great, thorough due diligence.  The former in my experience such as whistleblower claims may not arise or be known until many months after the whistleblower’s allegation.  During the interim, silence is all that is heard.  Under Medicare and federal law, no statute of limitation exists for fraud or False Claims.  While it is possible via indemnification language in the deal, to arrest a False Claims Act charge and ultimately unravel the “tape” to source the locus of origin and control at the time of the provider number, the same is not quick and not without legal cost.  Assuming the former provider is even around or can be found (I have seen cases where no such trail exists), winning an argument with CMS that the new provider is blameless/not at fault is akin to winning the Battle of Gettysburg – the losses incalculable.  Remember, the entity that a provider is dealing with is the Federal government and as such, responsive and quick aren’t going to happen.  Check the current status of the administrative appeal backlog as a reference for responsive and quick.

Assuming no payment irregularities occur, the list preceding is daunting enough for pause.  Assuming an existing provider number means assuming all that goes with it.  On the Federal side, that is a bunch.  The assuming party gets the compliance history of the former provider, including the Star rating (no, the rating is not on the SNF facility but on the provider operating the SNF).  As I have written before, Star ratings matter today.  Inheriting a two Star rating means inheriting a “dog that doesn’t hunt” in today’s competitive landscape.  It also means that any work that is planned to increase the Star rating will take time especially if the main “drag” is survey history.  The survey history comes with the provider number.  That history is where RAC auditors visit and surveyors start whenever complaints arise and/or annual certification surveys commence.

The Quality Measures of the former provider beget those of the assuming provider.  This starts the baseline for Value Based Purchasing.  It also sets the bar for readmission risk expectations, network negotiations and referral pattern preference under programs such as Bundled Payments.   Similarly, all of the previous MDS data submissions come with that same provider number, including those that impact case-mix rates under Medicaid (if applicable).  And, not exhaustively last but sufficient for now, all claims experience transfers.  This includes the precious error rate that if perilously close to the limit, can trip with one more error to a pre-payment probe owned, by the assuming provider.  Only extreme due diligence can discover the current error rate – perhaps.

Avoiding the peril of all of the above and rendering the pursuit or enforcement of indemnification (at the new provider’s expense) a moot issue is simple: Obtain a new provider number.  It is a bit time-consuming and does come with a modicum of “brain damage” (it is a government process) but in comparison to what can (and does) happen, a very, very fractional price to pay.  In every transaction I have been directly involved with, I have obtained a new provider number.  In more than one, it has saved a fair amount of go-forward headache and hassle, particularly on the compliance end.  Today, I’d shudder to proceed without a new provider number as the risks of doing so are enormous, particularly in light of the impact of Star ratings, quality measures and survey history.  Additionally, the government has never been more vigilant in scrutinizing claims and generating ADRs.  Inheriting someone else’s documentation and billing risks genuinely isn’t smart today.

While inappropriate for this post, I could list a plethora of examples and events where failure to obtain a new provider number and status has left the assuming provider with an absolute mess.  These stories are now, all too common.  Even the best due diligence (I know because my firm does it), cannot glean enough information to justify such a sweeping assumption of risk. Too much cannot be known and even that which can, should be rendered inconsequential by changing provider status.  Reliance on a definitive agreement and litigation to sort responsibilities and liabilities is not a prudent tactic. Time and resources are (always) better spent, applying for and receiving, a new provider number and provider status.

February 1, 2017 Posted by | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , | 3 Comments

Post Acute Resolutions for 2017

With a new year upon us and (perhaps) the most amount of free-flowing health policy changes happening or about to happen in decades, it seems appropriate to create some simple resolutions for the year ahead.  Similar to the personal resolutions most people make (get healthy, lose weight, clean closets, etc.), the following are about “improvements” in the business/operating environments.  They are not revolutionary; more evolutionary. Importantly, these are about doing things different as the environment we are in and moving toward is all about different.

First, a quick overview or framework for where health care is and where it is going.  A political shift in Washington from one party to another foretells of differences forthcoming.  It also tells us that much will not change and what will is likely less radical than most think.  Trump and the Republicans can’t create system upheaval as most of what the industry is facing is begat by policy and law well settled.  Similarly, no political operatus can change organically or structurally, the economic realities present – namely an aging society, a burgeoning public health care/entitlement bill, and a system today, built on a fee-for-service paradigm.  Movement toward a different direction, an insight of a paradigmatic shift, is barely visible and growing, while slow, more tangible.  In short: where we left 2016 begins the path through 2017 and beyond.

The road ahead has certain new “realities” and potholes abundant of former realities decaying.  The new realities are about quality, economic efficiency and patient satisfaction/patient focus.  The former realities are about fee-for-service, Medicare maximization, and more is better or warranted. The signs of peril and beware for the former is evident via today’s RAC activity and False Claim Act violations pursuit.  Ala Scrooge, this is the Ghost of Christmas Future – scary and a harbinger to change one’s behavior or face the certainty of the landscape portrayed by the Specter.

So, resolution time.  Time to think ahead, heed the warnings, realize the future portrayal and make plans for a different 2017.

Resolution 1: The future is about measurable, discernible quality.  No post-acute provider, home health or SNF, can survive (much) longer without having 4 or higher Star ratings and a full-blown, operational focus on continuous quality improvement.  The deliverable must be open, clear and transparent, visible in quality measures and compliance history.  FOCUS ON QUALITY AND IN SPECIFICS INCLUDING HAVING A FULL-BLOWN, FULLY INTEGRATED QAPI PROGRAM.

Resolution 2: The future is about patient preference and satisfaction.  For too many decades, patients have gotten farther detached from what health care providers did and how they (providers) did it.  No longer.  Compliance and new Conditions of Participation will require providers to stop paying lip-service to patient centered-care and start now, to deliver it.  The new environment is no longer just what the provider thinks the patient wants or should have but WHAT the patient thinks he/she wants and should have.  TIP: Brush-up on the Informed Consent protocols! FOCUS ON PATIENT PREFERENCES IN HOW CARE IS DELIVERED, WHAT PATIENT GOALS ARE, AND THEIR FEEDBACK/SATISFACTION WITH SERVICE. 

Resolution 3: Efficiency matters going forward.  This isn’t about cost.  It is about tying quality to cost and to a better outcome that is more economically efficient.  The measurement here is multi-faceted.  The first facet is utilization oriented meaning length-of-stay matters.  The quicker providers can efficiently, effectively and safely move patients from higher cost settings to lower costs settings, is the new yardstick.  The second facet is reductions in non-necessary or avoidable expenditures such as via Emergency Room transfers and hospitalizations/rehospitalizations.  NOTE: This ties back to the first resolution about quality. MANAGE EACH ENCOUNTER TO MAKE CERTAIN THAT EACH OF LENGTH OF STAY IS OPTIMAL, AT EACH LEVEL, FOR THE NEEDS OF THE PATIENT AND THAT ANY COMPLICATIONS AND AVOIDABLE ISSUES (FALLS, INFECTIONS, CARE TRANSITIONS) IS MINIMIZED.

Resolution 4: The new world going forward demands that we begin to transition from a fee-for-service mindset to a global payment reality.  This transition period will represent some heretical demands. While fee-for-service dies slowly as we know it, its death will include interstitial periods of pay-for-performance aka Value-Based Purchasing.  Similarly and simultaneously, new models such as bundled payments will enter the landscape.  Our revenue reality is moving and thus, a whole new set of skills and ideas about revenue capture and management must evolve. RESOLVE TO STOP LOOKING AT HOW TO EXPAND AND MAXIMIZE EACH MEDICARE ENCOUNTER.  THE NEW REALITY IS TO LOOK AT EACH PATIENT ENCOUNTER IN TERMS OF QUALITY AND EFFICIENCY FIRST, THEN TIE THE SAME BACK TO THE PAYMENT SYSTEM.  REVENUE TODAY WILL FOLLOW AND BE TIED TO PATIENT OUTCOMES, ETC.

Resolution 5: To effectuate any kind of permanent change, new competencies need development.  Simultaneous, old habits non-effective or harmful, need abandoning.  The new competencies required are care management, care coordination, disease management, and advanced care planning.  Reward going forward will require providers to be good at each of these.  Each ties to risk management, outcome/quality production, and transition efficiency.  Remember, our rewards in the future are tied to efficiency and quality outcomes.  Advanced Care Planning for example, covers both.  Done well, it minimizes hospitalizations while focusing on moving patients through and across higher cost settings to lower cost settings. THIS IS THE YEAR OF BUILDING.  RESOLVE TO CREATE CORE COMPETENCIES IN ADVANCE CARE PLANNING, CARE COORDINATION AND THE DEVELOPMENT AND IMPLEMENTATION OF BEST-PRACTICE, DISEASE MANAGEMENT ALGORITHMS AND CARE ALGORITHMS IN AND ACROSS COMMON DIAGNOSES AND RISK AREAS (e.g., falls, skin/wound, heart failure, pneumonia, infections, etc.).

Resolutions 6: The world of post-acute is changing.  To change or adapt with it requires first and foremost, knowledge.  Too many providers and often, leadership within don’t understand the dynamics of the environment and what is shifting, how and when.  Denial cannot be operative and as Pasteur was famed to say, “chance favors the prepared mind”.  Opportunity is abundant for those providers and organizations that are up-to-speed, forward thinking and understand how to use the information available to them.  RESOLVE TO EDUCATE YOURSELF AND THE ORGANIZATION.  KNOW HOW THE 5-STAR SYSTEM WORKS.  KNOW WHAT VALUE-BASED PURCHASING IS ALL ABOUT.  KNOW THE MARKET AREA YOUR ORGANIZATION IS IN AND HOW YOUR ORGANIZATION COMPARES FROM A QUALITY PERSPECTIVE (MEASURED) TO OTHERS.  KNOW THE HOSPITAL PLAYERS AND THE NETWORKS.  KNOW YOUR ORGANIZATION’S STRENGTHS AND WHAT IMPROVEMENTS NEED TO BE MADE.

Happy 2017!  The beauty of a New Year is that somehow, we get a re-start; a chance to do and be different than what we were in the prior year.  For me, I like the CQI approach best which is more about constant evolution than a wholesale, got to change now, approach.  Success is about doing things different as realities and paradigms shift.  We are certainly, from a health care and post-acute industry perspective, in a paradigm shift.  Take 2017 and brand it as the Year to Become Different!  The Year of Metamorphosis!

January 4, 2017 Posted by | Home Health, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , | Leave a comment