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.
Wednesday Feature: Happy Mother’s Day
This upcoming Sunday is Mother’s Day. Despite its commerciality, it does have a history dating back to the early 1900s. In 1908, Anna Jarvis in honor of her deceased mother, Ann Reeves Jarvis created the first U.S. version of Mother’s Day. Ann Reeves Jarvis was an activist who founded Mother’s Day Work Clubs. A staunch Episcopal Methodist woman, she taught Sunday school. It was during a Sunday school class that her daughter supposedly, came up with the inspiration for Mother’s Day via a prayer. Notably, as the holiday took on a greater focus toward gifts and cards for moms, Jarvis became unfavorable to the day as now commemorated. The actual holiday as we know it became nationalized in 1914.
Celebrations related to “mothers” date back to ancient Greek and Roman times. Festivals were held in honor of the mother goddesses of Cybele and Rhea. Mothering Sunday is a Christian festival that started in the United Kingdom and Europe. It occurred on the 4th Sunday of Lent, Laetare Sunday, where Christians returned to their mother church – the main church in their locale for a special worship service. This tradition ultimately became more secular, focused on gifts to mom and then more or less, merged with the American tradition in the 1930s and 1940s.
Below are some fun Mother’s Day facts that most people probably don’t know.
- Mother’s Day is typically the busiest day of the year for restaurants.
- More calls are made on Mother’s Day than any other day of the year.
- Mother’s Day is the third highest sales day of the year for plants and flowers.
- President Woodrow Wilson signed Mother’s Day into law in 1914.
- Last year (2022), $31 billion was spent on Mother’s Day with the average gift amount of $245.
- The most popular gift on Mother’s Day is a card and 41% of folk buy jewelry for mom.
- Mother’s Day is a worldwide holiday.
As we approach this weekend and our honor and celebration of moms, I think very much about mothers, mine of course (who has passed) but also of the role of “mother”. Being a mother is not solely, a biologically driven title. Mom is a title more universal than just related to a person that gave birth. My wife is a mother, but she never gave birth. Parents of adopted children are moms and dads, just the same. I’ve known many adoptive parents and they are just as attached, just as loving, just as committed, and yes, just as hopeful, frustrated, excited, etc., as biological parents. Mom is sometimes nature but always, nurture.
The universality that I attribute to “mom” comes from my own history. My grandmother served in many ways, as a surrogate mom when I was growing up. I spent many, many days with my grandmother and she in turn, nurtured me in the same ways as my mom. She was a kind but a pious and serious woman; the matriarch of the family. She was about chores, reading, and always, amazing food. My mom somehow, never got the cooking or baking gene from my grandmother. She passed away just shy of 102 and I will always, have cherished memories of her as an “additional” mom in my life.
So, on this Hump Day, I wish all the moms, grandmoms, and mothers to be, a joyous and cherished Mother’s Day. You deserve all the honor and appreciation you receive on Sunday as mom is and always will be, universally symbolic of nurture and care.
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.
Major Upgrade Needed: Care Coordination
I’ve been in and around healthcare for three plus decades and a concept that has always been front of mind for me is care coordination. This is something that is so important for a patient’s well-being in terms of improved outcomes and satisfaction. It is also a real opportunity for cost improvement. Unfortunately, I’ve seen this concept advanced via discussion but rarely via systemic adoption among providers. In fact, COVID set care coordination advances backward in many ways.
Care coordination is a patient focused process that seeks to single-point, map patient desired outcomes with patient needs. It seeks to connect providers to a common focus and to reduce steps, eliminate redundancy, and restrict unnecessary services or interventions. It in theory, reverses the driver’s seat role among the patient and providers, giving the patient voice the primary role as opposed to the provider (physician, etc.).
The challenge within the U.S. system is regulation and bureaucracy stifle care coordination. While we see regulations in the post-acute arenas prompting certain levels of care coordination, the regulations further segment rather than advance creativity. At the hospital/acute arena, the driver of care tends to be procedural and payment. There simply is little room for a holistic approach and/or a team approach. The driver of the admission is often, the need for an intervention. Multiple providers are involved (physicians) and the primary care provider of the patient by origin, is rarely if at all, involved. If the patient is elderly (the most common hospitalized patient), issues of multiple comorbidities and prior and current treatments confound the hospital stay. Tests are often repeated as no contemporaneous record follows the patient and history, may be sketchy at best. The ability to deliver effective care and coordinate the next step of the journey is bollixed by the need to complete the stay in the shortest time possible.
As more care and procedures for patients sub-65 with little prior comorbidity or controlled comorbidities are pushed outpatient, the inpatient hospital stays are dominated by elderly and/or complex care arising out of the need for major surgeries or trauma. For a senior patient, care coordination can be the difference between poorer outcomes, lengthier stays, and the need for additional inpatient stays, post-acute.
According to the Agency for Healthcare Research and Quality, care coordination is: “Care coordination in the primary care practice that involves deliberately organizing patient care activities and sharing information among all of the participants concerned with a patient’s care to achieve safer and more effective care. The main goal of care coordination is to meet patients’ needs and preferences in the delivery of high-quality, high-value health care. This means that the patient’s needs and preferences are known and communicated at the right time to the right people, and that this information is used to guide the delivery of safe, appropriate, and effective care”.
Broadly, care coordination involves a specific framework that emphasizes data sharing, teamwork, and patient-focused assessments clinical and psycho-social in nature. The desired outcome is a shared plan of care that covers admission, in-stay communication and education, and transitions from acute to post-acute. In some cases, the stay maybe an inpatient post-acute stay (e.g., SNF) with the same series of events (shared plan of care, communication and education, transition planning).
COVID in particular, illustrated how fractured the health care system in the U.S. remains. Care denials and delays became the norm and patients lost connections with their physician, clinics, and other providers. Access, already a problem, caved in many cases and for some, remains a continued problem as staffing shortages already at-risk, manifested. A few weeks ago, I wrote a post about access problems for SNFs and Home Health resulting post COVID. The post is here: https://wp.me/ptUlY-vL
The U.S. healthcare system is notorious for its silos. The silo issue is what care coordination attempts to ameliorate. For a senior adult patient, this issue of silos is incredibly perilous. Without direct connection within the system, it is not uncommon for a senior to either avoid care due to the access complexity or receive care that is unnecessary or unwanted, driven entirely by systematized processes. In other words, I have seen older adults all too often, become victims of polypharmacy for example, simply by seeing multiple physicians, all of which prescribe without going through medication reconciliation BEFORE writing the script. I’ve seen repeat procedures within the same day – multiple tests that don’t get checked because the patient follows orders and doesn’t ask questions. I’ve seen X-rays taken two days prior lead to an MRI, just to be cautious.
Objectively, and I have written this before, the system needs to be redesigned to advance the goals of patient care as primary, in fact, driven by a fundamentally simple concept known as primary care. The need for a different system and one that emphasizes care coordination, is succinctly stated by the Institute of Medicine.
- Current health care systems are often disjointed, and processes vary among and between primary care sites and specialty sites.
- Patients are often unclear about why they are being referred from primary care to a specialist, how to make appointments, and what to do after seeing a specialist.
- Specialists do not consistently receive clear reasons for the referral or adequate information on tests that have already been done. Primary care physicians do not often receive information about what happened in a referral visit.
- Referral staff deal with many different processes and lost information, which means that care is less efficient.
For readers interest in care coordination and applications, tools, and additional reading, I’ve provided some resources below including a presentation I did with some colleagues at a LeadingAge national conference a few years back.
https://www.qualityforum.org/ProjectDescription.aspx?projectID=73700
https://www.ahrq.gov/ncepcr/care/coordination.html
Friday Feature: REIT Update
Like all healthcare/senior housing investments during the pandemic, REITs experienced turbulence and stagnant growth. Coming out of the pandemic, the outlook has started to brighten but, challenges remain in adjusting REIT portfolios. The adjustments are fundamentally, selling under-performing assets within their portfolios.
Rebounds in occupancy are providing some bright spots though assets within, remain a bit murky for most senior housing dominant REITs. Nursing home concentrations continue to lag in terms of recovery as average plant age remains “old”, occupancies are depressed (80% ish), operating costs have increased faster than revenues, and liability headwinds are increasing. Yet, some of the larger REITs are seeing their Senior Housing Operating Portfolios more favorably these days post Covid, primarily as product demand remains strong (demographics) and supply in relation, is rather flat to somewhat down (no real building going on). The strongest performance elements remain housing vs. health care or Independent, Assisted and Memory Care versus skilled nursing.
Dissecting where REITs are at, I took and in-depth look at two of the largest with extensive senior housing portfolios – Welltower and Ventas. Each has a different operating approach with Ventas, strictly providing investment and business guidance and infrastructure services and Welltower, actually providing direct management (though not for every asset). In late 2022, Welltower received permission from the IRS to direct manage 45,000 Independent Living units within its portfolio. Below is a summary of where each REIT is at and what they see as an outlook for the remainder of 2023 and early 2024.
Welltower: First quarter results were better than expected with year-over-year same shop net income growth of 11% advanced by net operating income growth within the senior living portfolio of 23.4%. The drivers were year-over-year occupancy and revenue growth per occupied room of 6.8%
From an investment perspective, Welltower did $785 million gross of investment activity comprised of $529 million in acquisitions and funded loans alongside $287 million in development funding. Within this development number were four projects at $57 million. There was $92 million of property dispositions and loan payoffs.
Welltower continues to rebalance its senior housing property portfolio, reducing SNF holdings and concomitant risk concentration. As part of this plan, Welltower continued to transition and sell its Pro Medica operated facilities (147 SNFs) to Integra Health Properties. In January, Welltower sold to Promedica, a 15% interest in 31 SNFs for $74 million. This represents the second piece of a Welltower/Integra 85/15 joint venture. The remaining components will finalize in 2023.
Going forward, Welltower is expecting continued occupancy improvement to drive same shop operating revenue gains of 9.5%. Improving labor outlook in terms of hiring and retention is also adding positivity to improved performance outlooks. Year-over-year occupancy gains are projected at 230 basis points. From their investment presentation: Positive revenue and expense trends are expected to drive YoY SS SHO Portfolio NOI growth of 17% – 24%.
As the senior housing industry has headwinds, Welltower will no doubt experience some. The question is, how much and when. Higher interest rates and a stronger dollar will affect dividends. The same, could create a recession and thus, drag some occupancy rate projections downward. A recessionary job market, however, could add incremental labor gains at softer prices (wages).
Ventas: Ventas first quarter earnings report is set for release on Monday, close of market. We can, however, see a similar recovery trend for Ventas as with Welltower, improving occupancy, more stable expenses, and increasing same shop revenues via improved pricing and occupancy. Fourth quarter 2022 saw an overall portfolio occupancy improvement to 82.5% and a Net Operating Income for the portfolio of 19.1%.
Like Welltower, Ventas is bullish on demographic trends noting the growth percentage of the 80 plus segment/cohort of the population. In the next five years, the growth rate for this group is forecasted at 23%. Couple this demographic shift with a historically low new unit pipeline (COVID and interest rate impacted), unit absorption of existing product begets a favorable occupancy trend, at least in the near term. For Ventas, 99% of their portfolio is in locations with no new construction starts within 5 miles. A primary market for a senior housing location is 5 to 7 miles.
For occupancy growth, Ventas is projecting year-over-year improvement of between 130 and 170 basis points – a bit less bullish than Omega. Overall portfolio revenue growth of 8% is the forecast with NOI growth at 5%. They are expecting improved hiring and moderating inflation, along with improved topline revenues, to generate the NOI improvement.
Rent increases and care rate increases are forecasted at 10% and 11% respectively. What is interesting to me is the forecast on expense improvements. Labor is pegged at 43% of revenue (61% of expenses) with only 2% equating to contract labor. That is exceptionally low in today’s market and certainly, not indicative of a trend I have seen among most operators. In all other expense categories, Ventas if forecasting decreases (-5% taxes, -4% in food, utilities, and maintenance, and -2% in insurance). This pegs year-over-year expense growth at 5% vs. 2022, at 8%.
To me, the risks of achieving these results are similar to Welltower. First, moderating labor cost may or may not materialize though, a recession could help. Interest rate increases could push the economy into a recession, cramping occupancy gains. Energy is a wild card for me from an inflationary perspective as during a recession, gas/fuel oil will fall via weaker demand and as stronger dollar yet worldwide turbulence, may throw a wrench into this outcome. Insurance costs are rising so it’s odd to me that a savings of 2% is attainable across any senior housing portfolio.
After Monday, I’ll take a peek at Ventas first quarter results and then, add it to my files. Later summer, I’ll take an overall look at the REIT sector and maybe, drop a quick update to this post.
TGIF!
Senior Housing Marketing: Bumpy Road Ahead
On Wednesday, the Federal Reserve added another .25 point to its baseline interest rate – federal funds rate. The rationale is to continue to reduce inflation which, is running at decade highs. The trickle-down effect will begin with capital costs and capital access, impacting all kinds of industries but first and foremost, the real estate industry (commercial and residential). Borrowing costs and access to funds has changed dramatically since 2020. In mid-2020, mortgages were widely available below 3% fixed for 30 years. Residential real estate rode a significant wave in rising housing prices and rapid sales.
Today, the residential market has ground to a near halt. While home prices remain steady to a large extent, buyers have fled due to high mortgage costs and bank lending constriction. Recent bank failures have not helped banking confidence or improved lending access, personal or commercial. As a result of the Fed’s need to fight inflation and to reduce overall liquidity in the monetary system (lower money supply), the Fed quit buying mortgage-backed securities in March, therefore no longer directly supporting the mortgage market. Without the Fed keeping the liquidity of the mortgage market “up”, mortgage rates will remain higher for a longer period and banks will be pickier about lending as the buyers for mortgages are now private entities, more concerned about profit and the underlying credit.
So as not to confuse my readers, the title of this post is right-on and while a bit of economics starts this post, it is relevant to senior housing. Senior housing, especially independent, above-market products rental and entry-fee are very much occupancy impacted by the residential real estate market. I have written and spoken about this connection for years. The typical senior housing move is a transition from a private residence of some sort with the proceeds from the sale, used as a resource for the senior housing stay. With entry fee sales, the net proceeds from the home sale very much correlates to the resource for the entry fee. Market data has shown us for decades that there is a very strong relationship in the sales process between what a resident in a market area can liquidate his/her residence for and what the net proceeds will “purchase” in term of a CCRC unit. Well positioned CCRCs in a market have entry fees very closely tied to the average net sale value of homes in the primary market. Even today, few seniors will want to dip into estate values to pay for a senior housing unit. A good resource is a presentation I did a few years back: Value Propositions and Markteting 4 14
The primary factors that drive new sales and work on impacting occupancy positively, are as follows.
- Demographics in the target market – age, net worth, income level favorably matched against the product (price, demographic, location)
- Overall supply of units in the market current and anticipated. Senior housing demand is very elastic. Supply ranges of product will shift based on the price and the economic conditions within the market area.
- The condition of the residential real estate market in the primary market area. While national trends are one thing, the translation of those trends locally is the key. Not all local markets fare equally to the national trend. Interest rates aside, a growing market may attract more buyers still willing and financially capable of buying homes, even at a premium (see Florid for example).
- The condition of the property/senior living site. Is it in good condition and is its reputation positive.
The trends in occupancy and thus, marketing have shifted dramatically as a result of the pandemic. Occupancy in rental and entry-fee projects for the most part, remain below pre-pandemic levels. While CCRC occupancies are strongest and still growing (albeit slowly), at the present course of improvement, we are approximately 2.5 years away from pre-pandemic levels (91% vs. 87% today). This time period may elongate if interest rates remain high and real estate inventory (for sale), remains low.
During the pandemic, to maintain and attempt to increase occupancy via sales, I noticed a lot of communities resorting to incentives of one form or another. Fortunately for the CCRC/senior housing market, new inventory slowed and remains slow. Existing units today, have a greater opportunity to gain ground as new product is not coming on the market with the same fluidity as pre-2019. Capital access and costs have abated many new, planned projects either permanently or temporarily.
Incentives have long been a staple of generating unit pre-sales, holds, and interest/waiting lists. Conversion to occupancy often includes different incentives, directly tied typically, to rent abatement or stabilization (so many months free, no rent increase for so many months, etc.). Other softer incentives include moving fees (pay for the move), meal additions, decorator services, relocation coordination, etc.
The road however today, is bumpy and will be so for a while. Two difficult financial/economic conditions are at-play and both, hamper demand when the desire, is to sell above-market cost units. First, the real estate market in terms of liquidity, is exceptionally slow. New listings lag from pre-pandemic levels and new sales the same. A good data source that I use to watch these trends is here: https://www.redfin.com/news/data-center/
The second condition is overall estate values are down. Seniors with market investments in their retirement plans have seen minimally, on average, a 25% erosion in value. This constriction reduces their willingness and confidence to buy into, more expensive (real or perceived) housing. Further, familial support or influence tracks a similar downward confidence curve meaning, family become less supportive of a move that is further perceived, as negative to estate values. Remember, the U.S. mindset still has a strong connection to passed-through or down wealth transfer (e.g., kids receiving inheritance from mom and dad).
Strategies do exist for CCRCs and other senior housing projects to make inroads in occupancy gains, even in a tight market. Here are a few that I have used and can recommend as having some value.
- Use equity and/or internal financing mechanisms to assist in achieving liquidity for a senior’s home. Banks will typically step forward if the home has substantial equity and are often willing, if the CCRC is a partner, to provide the loan allowing a move to occur. The challenge then falls on maintaining the vacant property but that is less difficult than one would think with a bit of creativity.
- Defer the entry fee to a later date. Take the move off the table so to speak, allowing the senior to move while the house is still on the market, even if the timeframe is elongated. Another option is to pay the entry fee in installments.
- Work with a realtor that will package a transition service at a reduced commission allowing for home sale/pricing flexibility.
- Purchase the home, if feasible. I have seen organizations do this and then, when market conditions change, resale the home. This is complex and fraught with all kinds of detail issues, but it can be done.
Wednesday Feature: Lessons from a Cat
Happy Hump Day! I am a cat fan and a cat dad. Ever since I can remember, cats have been part of my life. I love dogs too and have had a number as pets, but I am partial to cats. My wife and I share our spaces with two cats: Mac and Cheese. You can guess what color they are.
Mac and Cheese are brothers. They have never been apart. Though they share a resemblance, being around them for any length of time, you could separate them quickly. And as cats go, they are both different yet, in many ways the same. Their lives are somewhat separate as each has his own routine and personality but, they are interconnected. They play together, sometimes sleep together, share food together, call for each other at night to play, etc. Mac is dominant, bigger and more social. Cheese is more traditional cat-like: sleeps more and is kind of aloof.
What I marvel about cats is their grasp of the world around them and their distinct ownership of all that enters this world. Cats are phenomenal athletes, evidenced by their grace in contorting into tight spots, contorting into sleep positions, and navigating ledges and rims without falling or disturbing things in their path. And, while a housecat is domesticated, they never lose the predatory heritage. Even Mac and Cheese will prowl, seek bugs, destroy toys, etc.
There is much to learn from being around cats and observing their lives within the spaces they inhabit, including with people. In almost a Zen way, cats can teach us important things – things we should adopt as beneficial to our own lives, success, and fulfillment. Below are fifteen things that cats can teach us, adopted from care.com: https://www.care.com/c/15-things-cats-teach-us-about-life/
- Indulge Your Curious Spirit
- Choose Your Friends Wisely
- Get Plenty of Rest
- Maintain a Well-Groomed Appearance
- Don’t Forget to Show Appreciation
- Eat More Fish
- Stay Aware of Your Surroundings
- Spend Time Soaking Up the Sun
- Take Time to Sit Still and Really Notice Things
- Don’t Sweat the Small Stuff
- Stretch Regularly
- Ignore the Little Things that Tend to Irritate You
- Look Before You Leap
- Don’t Lose Your Playful Energy
- Don’t Get Discouraged
I hope this message makes your day – Happy Hump Day!
May 11 and PHE: Provider Alert
On May 11, the COVID Public Health Emergency (PHE) is set to end and along with it, a whole slew of requirements end or change, and regulatory waivers applicable to the Public Health Emergency, the same (ending). The end of the PHE will have positive and negative impacts on providers of all types though some things that were applicable during the PHE will continue via CMS rulemaking (tele-health provisions for example). One of the most negative impacts of regulatory waivers ending is the return of the three-overnight rule (3 day stay) for patients entering an SNF and potentially, receiving Medicare coverage for their qualifying stay. I wrote a post on this waiver change here: https://wp.me/ptUlY-w5
Among the most notable changes that will occur for providers with the end of the PHE are the requirements around masking, testing, and vaccination mandates for staff. Each of these conditions are effectively, eliminated with the expiration of the PHE. While other countries across the world have eliminated all or most of their pandemic restrictions/requirements over the past year, the U.S. and its health system have been slow to relax requirements with the Biden Administration extending the emergency up until May 11. Similarly, the emergency patchwork has followed through to states, some long ago abandoning masking requirements, vaccination mandates, testing, etc. What has been confounding is the myriad of rule interpretations and requirements that varied from municipalities to counties, to states, and ultimately, to the Federal government. For Medicare/Medicaid providers, Federal requirements superseded all other provisions in any other jurisdiction.
Within the Public Health Emergency period, even providers not participating in Medicare or Medicaid were impacted by the Federal policies. Many states chose to follow the Federal PHE provisions, layering the same over providers within the senior housing industry (aka Assisted Living and some CCRC/Independent Living under state law). Illinois is an example. In contrast, other states chose to ignore the Federal PHE provisions when not applicable to providers such as hospitals, nursing homes, home health, etc. Iowa, Florida, Texas are examples of states that early-on in the pandemic created rules or as in the case of Iowa, passed legislation prohibiting vaccine or mask mandates within state control.
Come May 11, confusion will no doubt remain prominent on COVID infection control/public health requirements. For example, the only updated CDC guidance on masking requirements dates back to September of 2022. In this guidance, the recommendation for masking requirements for visitors, patients, and staff is conditioned on a CDC tracking mechanism for the level of community concentration of COVID infection. Reporting from health departments, hospitals, SNFs, etc., fed this mechanism. Masking recommendations were tied to this level (high recommending masking vs. low, recommending optional masking). COVID testing requirements were also tied to this measure.
Effective with the end of the PHE, CDC has indicated that it would no longer report on the level of community infection/transmission. The PHE has deferred consistently to various agency recommendations for requirements and then subsequently, enforcement as needed. Clearly, we will see extensive confusion unless the CDC issues new guidance clearing up, the masking requirements tied to community COVID prevalence. I’ve watched many providers already move to a “no mask required” status, regardless of updated guidance. I’ve also watched many providers stuck and confused by virtue of state requirements vs. CDC requirements vs. where the community COVID prevalence really was in their area. The CDC guidance for long-term care (fundamentally the same for hospitals) is here: https://www.cdc.gov/coronavirus/2019-ncov/hcp/infection-control-recommendations.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fhcp%2Fnursing-home-long-term-care.html
I’ve seen some news coverage/reporting on the end of the Public Health Emergency, but it is very spotty. I also know by virtue of travel, etc., the awareness of COVID among providers and the community is varied. As I routinely traverse Illinois, Wisconsin, and Iowa, I see wide differences in COVID precautions, alerts, monitoring, requirements being applied, etc. Some of this due to region and state policy and some of it is due to provider behavior. Iowa as I mentioned, long ago took a stance against most PHE COVID related mandates and recommendations whereas Illinois, has followed the PHE Federal recommendations consistently. Iowa hospitals required to follow CMS COVID regulations, maintained vaccination and masking conditions though recently, I have seen most hospitals end masking requirements.
For providers, May 11 is very near. I suggest providers adopt the following strategies realizing, come May 11, regulatory confusion will likely remain.
- Update internal infection control policies regarding vaccination, testing, masking to conform to the changes that will occur with the end of the PHE.
- Communicate these changes to staff ASAP.
- Communicate these changes to patients and families, ASAP. Remember, the end of a mandate does not mean a change in behavior. It may be that staff will want to maintain their masks in some cases and patients/families the same. Allow for flexibility.
- State agencies that are required to survey and enforce compliance may also be slow to adopt. Trade associations are your best bet to help with regulatory transition. Recognize, state agency behavior will not adjust in some cases, as quickly as provider behavior.
- Conduct ongoing public communication via your website, via newsletters, etc. One and done won’t work.
- Definitely, DON’T, follow a path of resisting the end of the PHE and its requirements. I’ve watched provider sometimes, fail to adjust and in this failure, more problems occurred. I know the old “an ounce of prevention” thinking may still apply when it comes to vaccines or masking but be careful. If the regulation is not there, a forced or strongly urged condition, can lead to regulatory problems, labor law problems, community relations problems, and potentially, litigation.
Medicare Advantage/Part D Final Rule
Early in April, CMS released the 2024 Medicare Advantage/Part D Final Rule and within, there are a number of interesting policy shifts that could benefit providers. The rule addresses a common practice that has been frankly, often abused by Med Advantage plans – prior authorizations or more commonly known as, “prior auths”. The crux is authorization provisions created delays in care and sometimes, denials for services that the patient and/or his/her physician believes are medically necessary. The SNF industry has most often been on the denial side of prior authorization requirements, either for the whole stay (initial transfer) or for a requested longer stay. The fact sheet for the final rule is here: https://www.cms.gov/newsroom/fact-sheets/2024-medicare-advantage-and-part-d-final-rule-cms-4201-f
With respect to prior authorizations, the rule seeks to make their use more connected to national coverage determinations (NCDs) and local coverage determinations (LCD), common to traditional Medicare. Back in April of 2022, the HHS Inspector General issued a report that included findings of Med Advantage plans use of authorization provisions to issue fairly widespread denials for various care and services. The denials either bar access to care for the patient or in some cases, deny payment to the provider for care and services rendered, subsequently determined by the Med Advantage plan to be “not medically necessary”.
The study noted that the Med Advantage plans were using medical criteria more restrictive than criteria under traditional Medicare (the national or local coverage determinations). Among cases reviewed, 13% of the Med Advantage denials were for care or services that would be covered under traditional Medicare. Other denials were technical in nature whereby the Med Advantage plan denied an authorization as insufficient in documentation yet, the patient medical record contained sufficient documentation of the medical need. In the cases of payment denials, while the payment requests were proper in terms of meeting Medicare criteria, the denials that did occur were due to processing or human claim review error. At a rate of 18%, this is a bit alarming as Medicare fee-for-service claims, properly billed, don’t have such an error rate. The OIG report is here: https://oig.hhs.gov/oei/reports/OEI-09-18-00260.asp
Another target within the rule with respect to Medicare Advantage plans has to do with marketing practices. The plans have become popular such that today, 45 % of all Medicare beneficiaries are enrolled in Med Advantage plans. Medicare anticipates this number to rise to 50% by 2025. Apparently, those annoying generic television ads promoting various Medicare Advantage plan features, some featuring celebrities like JJ Walker and Joe Namath, have gotten notice in Washington. No longer will that style of ad be permitted instead, requiring a specific plan to be identified and each ad, to eliminate images and language that is confusing or misleading (not sure how that will be monitored).
Another change or improvement relates to behavioral health access and coverage criteria. CMS is finalizing a new set of rules requiring Medicare Advantage plans to: “(1) add Clinical Psychologists and Licensed Clinical Social Workers as specialty types for which we set network standards, and make these types eligible for the 10-percentage point telehealth credit; (2) amend general access to services standards to include explicitly behavioral health services; (3) codify standards for appointment wait times for primary care and behavioral health services; (4) clarify that emergency behavioral health services must not be subject to prior authorization; (5) require that MA organizations notify enrollees when the enrollee’s behavioral health or primary care provider(s) are dropped midyear from networks; and (6) require MA organizations to establish care coordination programs, including coordination of community, social, and behavioral health services to help move towards parity between behavioral health and physical health services and advance whole-person care.”
I’m encouraging providers to read the rule’s fact sheet. Medicare Advantage providers will not simply or quickly, make wholesale adjustments to their existing practices because of this rule. Additionally, providers should always be aware of National and Local Coverage Determinations and use the same, as a “road map” for dealing with Med Advantage coverage and authorization issues. Providers will need to push the plans to make proper adjustments accordingly and to protect and advocate, for their patients. It will take time for the Med Advantage industry to adjust but, movement will happen quicker if providers hold the plans accountable.
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