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Senior Living/Housing M&A and Fitch

The title of this post likely appears a tad bifurcated but as you read through it, the title should make a bit more sense.  In the past two weeks, I’ve had numerous conversations with potential buyer’s looking at or for (to acquire), senior housing projects  (AL, IL, some CCRC and a few SNFs).   Invariably, the conversations center around the current prevailing notion that “now” is a good time to buy.  The most salient reasons I hear to support this belief are “values” are plentiful and capital is coming back to the industry.  Alas, I guess it is my job to be the bearer of “bad news” or, not really bad news but “truth”.  This is where the Fitch part of the title comes into play.

Fitch, the ratings agency, released its industry outlook for Senior Housing in mid-March and as suspected by most, the outlook remains negative.  This said, it should be noted that Fitch does somewhat confirm the belief that capital is returning, albeit slowly to the sector, and that the industry as a whole has “shown suprising resiliency”. Still, as detailed within the report, 2010 contains (likely) more negative or static news for the industry than positive or encouraging news.  Principal to Fitch’s outlook is its prognostication on ratings of debt issues (new and existing) and in this case, Fitch is predicting that the majority of rating decisions will be affirmations of existing ratings and when changes to ratings occur, Fitch is predicting more downgrades than upgrades.  For Fitch, the ratings outlook plus the overall sector economic outlook and trend is the basis for their sector outlook.

Overall, the report presents a great deal of carry-over of issues from 2009, namely the taint in the industry left over from the Erickson collapse.  Per Fitch, little has changed across the industry dynamic that caused Erickson to melt-down.  In specifics, their conclusions are;

  • Current economic recovery laxity and a slow and very limited recovery in the real estate sector will continue to hurt the industry.
  • Letter of Credit repricing risk in the next 12-24 months is high as current Letter’s of Credit renewal, banks that previously extended credit either may pull away entirely or provide renewals at significantly higher prices.  Today, the going rate trend for renewals is running at 50 to 200% higher for investment grade debt (BBB or better).  
  • Weaker liquidity levels for the industry will continue throughout 2010.  Since 2008, liquidity levels have dropped in the key measures of days cash on hand (down by nearly 75 days), the cushion ratio (down by nearly a full point) and cash to debt (down by 10%).  The concern as expressed by Fitch is for continued slow economic recovery or the potential of an additional market downturn, shocking liquidity again.
  • Cost of capital continues to run higher than periods prior to the economic downturn.  This is particularly true for non-rated debt and floating-rate debt and less so across a broader horizon for fixed rate debt.  In reality, fixed-rate debt today is priced attractively, considering the cost of variable-rate debt and LOC (Letter of Credit) fees.
  • The real estate recovery is barely, if at all visible, and for Fitch, this trend foretells occupancy fortunes for the sector.  The biggest impact on occupancy remains for new projects or projects with recent sizeable expansions.  Occupancy in general is down by 3 to 5% and for established providers, the trend has remained stable to marginally improving.

So the Fitch tie-in in the title?  What is known by Fitch is known by lenders and the capital markets and thus is known by investors.  In reality, a willing buyer and a willing seller today is only 50% of the deal; the other half is capital – unless the buyer is in an all-cash position.  I’ll elaborate a tad more at the end.

As I indicated earlier, my job is to be the bearer of the truth when I talk with buyers or interested acquirers.  The truth regarding the M&A scene today for senior housing is that the real value plays are projects that are small or distressed and those are virtually impossible to finance (notice I said “virtually”).  When and where financing can be obtained, if needed, for these distressed or smaller projects, the terms are stiff (rates, covenants, term, overall costs).  Where buyers are assuming more discounts should be available, sellers are not cooperating.  In short, there is a pretty solid gap between a seller’s valuation and a buyer’s valuation of the same project or group of projects.  Sometimes, this gap can be overcome but most often, for solid projects with decent cash flow, it cannot.  Sellers today have precious little incentive to reach down to buyers, especially if their project (single or portfolio) is stabilized, cash-flowing, and has a solid balance sheet (average or better than industry average capital and liquidity ratios).

Another complication for buyers is the lack of decent comparable transaction data over the past two years, especially in certain areas or regions.  Comparables drive valuations/appraisals and of course, valuations/appraisals drive lending terms and limits.  I have seen a pretty decent disconnect between deal terms and valuation results over the past two years and in a large part, due to a lack of decent, reasonable and recent comps.  Lenders, skittish as they are about the sector, are highly wary of comps from deals completed three or four years ago when the market was frankly, a tad over-heated and the economy, over-bloated.  Summary: Throw out the comps that may have made sense on a representative basis three to four years ago and try to find representative comps that are from a period of market stagnation and recession – the alchemy for a valuation disconnect.

For buyers, the reality is that the market is still seller-driven and I don’t see a dramatic change occurring throughout 2010.  Perhaps the most investment-ripe play is in the SNF sector as volumes are slightly up, bed prices are slightly up (albeit fractionally compared to a double-digit decline from 2008). In 2009, AL prices per unit continued to decline (30% aggregate since 2008).  Note: The price suppression is a reflection again on the weakness of the housing market plus the deals completed comprised primarily of weaker projects.  What the SNF sector offers today is “known” external variables and a disconnect from the real estate market.  With health care reform complete, the SNF sector is essentially “stable” for investment.  What this means is that revenues are easier to forecast and operating ratios quicker to analyze.  The prospects in other words, of a transaction are more tangible and easier to quantify.  This said, I still don’t see a ramp-up of activity, more perhaps a gradual increase with modestly rising or stable per bed prices and effectively, stable cap rates.

The AL and IL sectors will still remain a bit problematic for buyers unwilling to put a fair amount of cash into a deal or unwilling to use enough cash to create a financeable transaction for a distressed project.  Value buyers are going to continue to find that sound projects are few and far between on a true value play and the stickiest issues regarding valuations and financing will remain.

The conclusions I draw and the counsel I provide today is rooted in basic economics (my history).

  1. Buyers and sellers exist across the entire price/value continuum.  At times, the proportion of one versus the other (sellers vs. buyers) creates different strength/weakness propositions hence when a market becomes a buyer’s or a seller’s market.  Most often, historically, the market is neutral.  There is not enough volume today to characterize the market as predominantly strong for either side (buy or sell) but the dynamics are such that sellers with good projects have an upper-hand for the time being.
  2. The near term trend also favors sellers, especially as buyers begin to gain access to reasonable cost capital.  Initial cycles where capital becomes cheaper or easier to access favor sellers as buyers typically will use the new-found access to buy at price points recently considered by them as too high. 
  3. The intermediate term will favor buyers as the market seeks to return to “neutral”.  Sellers, seeing deals done at increasing prices and with increasing volumes, will shift their positions from hold to sell, trying to reap a piece of the action.  Too many sellers will enter the market and buyer’s will be favored.
  4. The credit markets will continue to gradually loosen but again, cautions regarding valuations need heed.  Buyers with solid credit, cash to add equity and sound balance sheets will find fixed rate deals more and more attractive.  New bond deals will also find fixed rate deals almost as attractive if not as attractive as floating rates with LOC enhancement, given the rising prices of LOCs. 
  5. As a rule, properties that are stabilized are likely at or just beyond their low census point.  I think occupancies will or have stabilized and start to trend back-up, although the slow to non-recovering real estate market will keep progress gradual.  Some markets will fare better than others.  I also see these same properties in a better overall position financially in 2010 than last year or the year before.  Providers have done a decent job getting “lean”, save perhaps their debt load.  The good news is that rates are not under pressure to rise so even potential increased LOC costs (as applicable) won’t alter too many balance sheets among the stabilized provider group.
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May 5, 2010 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , , | 4 Comments

Medpac Report to Congress: 2011

Earlier this week, Medpac (Medicare Payment and Advisory Commission) released its report to Congress.  Primary among Medpac’s duties is its provision of recommendations regarding payment updates under Medicare.  Below, I have broken out and summarized the recommendations.

Hospice (the points below the first bullet are continued recommendations from 2009)

  • 2011 rate is the market-basket less a productivity growth adjustment (per the Commission) netting a 1.1% increase.
  • The Commission recommends that Congress direct the Secretary to change the Medicare payment system to incorporate higher payments at the beginning of the stay and lower payments as the stay goes longer, with the exception of an increasing payment at or proximal to, the time of death. The recommended transition period is 2013.
  • The Commission also recommends that the Secretary require a physician or advanced practice nurse visit prior to the 180 day recertification period with corresponding documentation from the physician (or alternate) that the patient’s prognosis remains terminal with a corresponding note providing clinical substantiation of such prognosis.
  • The Commission recommends that the Secretary direct the Office of Inspector General to investigate the relationships (primarily financial) between hospices and skilled nursing facilities and assisted living facilities that lead to longer stays and increased benefit utilization.  The focus is to determine the appropriateness of hospice care provided within these settings by certain hospices that continue to demonstrate unusual referral and utilization patterns.

Skilled Nursing Facilities (SNFs)

  • Eliminate the payment update for 2011
  • Congress should establish a budget neutral quality incentive correlated to avoidable hospital re-admission rates and require SNFs to conduct patient assessments at admission and discharge.
  • Require the Secretary to direct SNFs to more accurately report diagnostic and service-use information in claims (claim to include dates of service, detailed diagnosis information, and services provided since admission recorded separately in the patient assessment).  The Secretary should also require SNFs to report their nursing hours in the Medicare cost report.
  • Medpac also recommended (continued from 2008) that the Secretary revise the PPS payment system by adding a non-therapy ancillary component and eliminate the current therapy component, transitioning thus to a therapy payment based on predicted patient care needs.  The Secretary should also adopt an outlier policy with corresponding payment.

Home Health

  • Eliminate the market basket for 2011 and direct the Secretary to rebase rates to reflect the average cost of providing home care services.
  • Direct the Secretary to modify the home health payment system to protect patients from reduced quality of care during re-basing.  The new payment system should include risk corridors and blended payments (prospective elements with cost-based elements).
  • Direct the Secretary to identify categories of patients with the greatest probability of benefitting from home health and then develop quality measures for each category.

Inpatient Rehab Facilities

  • Eliminate the payment rate update for 2011

Long-term Acute Hospitals

  • Eliminate the update for 2011 for inpatient rehabilitation services.

Physicians

  • Update payments for physician services by 1% for 2011
  • Congress should establish a budget neutral payment adjustment (up and within the current fee schedule) for primary care services provided by primary care physicians.

Hospitals

  • Increase inpatient and outpatient rates by the current market hospital market basket, concurrent with the start of quality incentive payment system.
  • In order to re-capture overpayments to hospitals, the Secretary should reduce payment rates (inpatient) by the same percentage (not to exceed 2%) for each year beginning in 2011, continuing to 2013, or until the over-payments are recouped.

My only comment regarding the Medpac report is that it is a continuation of the theme from prior years where the Commission is recommending payment reform, stabilized increases and revised payment methodologies.  These recommendations go hand-in-hand with the Commission’s consistent determination that Medicare, primarily in Hospice, Home Health and SNFs, has been overpaying for care.  I firmly believe that Congress will follow most of the Medpac recommendations, sans an implementation of health reform which would likely incorporate (the current versions do), much of Medpac’s recommendations.

To read the full report, click on this link. http://www.medpac.gov/

March 4, 2010 Posted by | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , | 4 Comments

CCRC Update

Within the past ten or so days, I took some time to review the financial and operating benchmarks for CCRCs.  The past eighteen months have likely been the toughest operational and financial period ever for CCRCs.  By the end of 2009, a small rebound in the economy via an increase in existing home sales, a solid financial markets recovery, and a bit of moderation in the capital markets improved the industry outlook heading into 2010.  Specifically, the lagging trends in occupancy stabilized and improved ever-so gently and key operating and capital ratios started to stabilize.  The result is that while key medians and benchmarks slid year-over-year (between 08 and 09), 2010 could be rebound year for the industry.  Below, I have included a chart of the 2009 CCRC medians as produced by each major rating agency (chart courtesy of BB & T Capital Markets, a division of Scott & Stringfellow, Inc.).

Where continued issues of concern remain are principally in newer, non-stabilized developments, CCRCs located in extremely depressed real-estate markets and CCRCs that are subject to having to refinance favorable debt packages within  today’s lending environment (expiring Letters of Credit, etc.).  Concerns that were present in early 2009 regarding entry fee CCRCs seem to have moderated as the improved real-estate market has made it possible for prospective residents to either move via selling their homes or be in a positive position to sell their homes in the near future.  Again, individual market dynamics play a major factor in how the upcoming months shake-out for new entry-fee CCRC sales.

An area of continued concern for CCRCs is the capital markets and the ability of owners/operators to access new debt at favorable terms.  Failures, albeit few in the industry, have made lenders cautious and today, rates and terms reflect the caution as well as the year-over-year decline in the industry benchmarks.  Fitch as well as other rating agencies has not yet fully warmed to the prospects of recovery for the industry as a whole and as such, continue to produce negative to bland outlooks for the industry.  Essentially, the story here is twofold: First, the upcoming year will remain a fairly down year for development as capital for new projects will not be plentiful and not at favorable terms, and; second, refinancing existing debt for solid operators with stabilized projects will be possible and increasingly so as the year progresses, though not yet at terms and rates that are better than the periods prior to 2008.

Looking at 2009 and ahead into 2010, a few key items for CCRC owners/operators to review are as follows.

  1. Sales always lag marketing efforts and as a result, CCRCs that have stuck to their marketing plans and stayed engaged with prospective residents will reap the rebound “rewards”.  Any CCRC that has pulled too far back on continued marketing needs to get busy now to improve their 2010 prospects.
  2. Entry fee CCRCs need to be continuously vigilant regarding their pricing and the economic conditions of their market place.  Entry fee CCRCs have the most elastic demand curve and price positioning is key to staying forefront in the senior’s demand cycle for retirement housing options.
  3. When and if the GAO produces its report on CCRCs, the principal focus will be on disclosure and customer knowledge.  In effect, the key “take-away” here is this process is all about consumer protection.  Aside from making sure the finances are solid, CCRC owners/operators need to beef up their consumer disclosures, their education efforts and clean-up their contracts and marketing materials.
  4. The four key benchmarks, aside from occupancy, that a CCRC needs to focus on for 2010 are: Net Operating Margin, Excess Margin, Days Cash on Hand, and Debt per Unit or Bed.  If a CCRC is considering accessing the capital markets or borrowing from any lending source, moving these indicators up or down as appropriate to rank better than the median will improve the terms and rate available to your project.
  5. Soft and recovering markets call for strategic pricing evaluation and strategy.  It is important to continue to increase revenues but doing so simply through rate increases may not be the best approach.  Rate increases are one component of an overall pricing strategy.  If a CCRC has not done a complete review of its competitive posture, its pricing structure and especially, its value proposition correlated to price, it should consider doing so immediately.

February 2, 2010 Posted by | Senior Housing | , , , , , | Leave a comment

Non-Profit Health Care Outlook for 2010

Moody’s Investor Service released their annual sector outlook today for not-for-profit health care organizations, stating that they (Moody’s) continue to maintain a “negative” outlook on the industry.  Important to note in this report is that the focus is principally on hospitals and since the report is produced by Moody’s, its primary perspective is on credit and investment.  That said, even with the predominant focus being on hospitals, there is quite a bit of take-away information for non-profit health care providers in general, including those in the post-acute sectors.

The emphasis Moody’s places on their negative or dim outlook is economic related primarily and public policy weighted secondarily.  They point to the continued weak economy as the cause for slack patient volumes and concerns regarding provider debt levels, particularly those providers that may be facing an expiring Letter of Credit (LOC) situation over the next twelve to eighteen months.  With regard to public policy issues, Moody’s points to budget insufficiency issues in Medicare and Medicaid foreshadowing tighter or declining reimbursements and uncertainty of the outcome of health reform although, as they indicate, the legislation today, is effectively in limbo.

According to Moody’s, the weaknesses inherent for non-profits are their reliance on governmental sources for payment more so than proprietary operators and their need to be cautious of their tax-exempt status in terms of a political culture requiring more and more justification of expenditures made on behalf of the uninsured or under-insured population.  I would also add that other forces such as unions are today, targeting non-profits more so than ever and the result is higher labor costs and higher legal defense costs (to abate organizing campaigns).  Similarly, the plaintiff’s bar is far more active today and for non-profits, their fair-haired status once given due to religious affiliations primarily, is all but gone.  It is not uncommon any longer for attorneys to seek damages against large or for that matter, even small to medium-sized non-profit providers. 

The report cites the following reasons as the primary factors contributing to Moody’s negative outlook.

  • Sluggish patient volumes due to high levels of unemployment combined with the loss of health insurance.
  • Pressure on revenue streams, particularly Medicare and Medicaid combined with intensified recovery activity (RACs and Probes).
  • Greater difficulty in cutting costs due to the cost-cutting measures already undertaken in 2009 and late 2008.  There is little room remaining for significant expense reductions. 
  • Increasing bad-debt exposure.
  • Debt structure and liquidity risks driven by high bank exposure, potentially expiring LOCs and less than a full recovery of investment losses.
  • Greater or increasing capital needs after a year or more of deferred capital spending.
  • Expiration of the federal stimulus program at year-end 2010.

In addition to the above negatives, Moody’s cites three positive factors.

  • For some providers, strong management capability that allows the provider to respond quickly to negative operating changes and positive improvements as they occur.
  • Partial recovery of investment losses adding back some liquidity.
  • Likely increase in merger and acquisition activity which Moody’s believes is good for the market.

As I reviewed the report, my conclusions are as follows.  These conclusions I believe, are universal for all non-profit health care providers.

  • The pace of economic recovery will push forward or hold back, the recovery of non-profit health care provider’s fortunes.  A quickening pace including job growth will help providers recover quicker although a lag in terms of patient volume increases will clearly be present.  A slow, mixed recovery with equally elongated new job creation will hurt providers and potentially, lead to insolvencies and failures.  The key to remaining solvent in the event of a slow recovery is debt structure, depth of product/service mix and generally low non-wage related labor costs (turnover, legal issues, compliance problems, supplemental staffing costs, etc.).
  • Access to capital at reasonable terms will remain an issue for the sector throughout the bulk of 2010.  While I see some softening, the present stance the Feds are taking on taxing the banking industry could very quickly, chill any warmth that has softened the credit markets. Within the next twelve to eighteen months, a very large ($19 billion) amount of Letters of Credit will come due.  Providers with struggling balance sheets or under-performing newer projects may struggle to meet new conditions and terms to enhance their credit.  Without question, debt costs and the related costs associated with debt issuance will continue to be higher than any period over the last five plus years.  The significant question remaining about access to capital is what role the Feds will play and will they continue to bolster lending activities via HUD to help stabilize some of the credit/lending markets.
  • Of particular concern to me and in concert with the point immediately above is the growth in deferred capital investing that is occurring, particularly in the SNF industry.  This industry is already dominated by aging physical plants and as providers have been forced to defer capital investment due to the economy and due to the reimbursement climate, the industry continues to shed asset wealth via depreciation and become more functionally obsolete.  With growing regulatory pressure for SNFs in terms of environmental standards and new mandates on fire suppression systems, access to reasonable cost capital will be imperative for this industry to modernize and recapture at least a portion of its physical plant asset wealth.
  • With health reform on the Washington back-burner for the moment, I believe providers will tend to breath a collective sigh of relief – prematurely.  While I believe that a reform conflagration is not imminent, the fiscal woes of Medicare and Medicaid trudge on and as a result, the reimbursement outlook from my perspective, remains rather bleak.  There will be continued financial pressure at the federal and state levels to reduce or reign in the trajectory of entitlement spending and as a result, I believe providers need to be vigilant about the prospects of flat to declining reimbursement rates.  Of particular concern to providers should be Medicaid which today, is heavily bolstered by federal stimulus dollars set to evaporate in December.  With state budgets remaining in the “tank” due to the slow recovering economy, states are going to be looking for Medicaid savings with a vengeance unless the feds continue additional matching provisions or add new dollars.
  • In the merger and acquisition area I’m less of a believer that this market will heat-up than Moody’s is.  I think that the time is certainly ripe for some increase in activity but I believe that the credit markets will have more to say about the volume than the desire of providers to acquire or be acquired.  I do believe however that this is an opportune time for non-profits to look at merger and affiliation arrangements as opportunities are plentiful, the benefits of consolidating balance-sheets are obvious, synergies can be maximized across and within markets, and the costs of mergers/affiliations are far less and can be completed with minimal to no need for new debt.

Any readers that would like a PDF copy of the Moody’s report can go to the Author page and send me an e-mail request.  In your request, please provide me with your full name and a working e-mail address that I can use to forward the document.

January 28, 2010 Posted by | Assisted Living, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

House Approves Doc Payment Fix

Last night via a 243 to 183 vote, the House approved a bill that would stave off the projected 21% cut in physician (fees) reimbursement under Medicare, set for January 1, 2010.  The “Doc Fix” has been a hot-button issue within the health care reform debates as both the House and the Senate have not been able to incorporate the costs within their reform bills without busting the President’s deficit spending targets.  President Obama has stated that he will not sign a reform bill that is anything less than budget/deficit neutral. 

The House bill would cost the Federal government approximately $300 billion with no projected revenue offset.  This $300 billion is presumed to be all debt or certainly, the majority share will be debt.  The Bill does somewhat create a more permanent fix to the flawed formula presently in place.  The original formula, in place since 1997, ties physician reimbursements under Medicare to a GDP index, designed to theoretically reduce the overall growth in Medicare spending (the Sustainable Growth Rate formula).  Since 1997 however, Congress has seen wide swings in physician reimbursement levels and in periods or times when the rates would be reduced via the formula, the physician community has lobbied heavily for a “new money” infusion to avoid fee cuts.  What has occurred since the formula’s installation in 1097 has been far from a stabilization of physician fees and a near yo-yo battle every year between the Medical Community and Congress.  The “fix” in the House bill ties physician fees to GDP growth but provides a plus 1% add-on for all non-primary care physicians and a 2% add-on for primary care physicians.   

The Bill faces unlikely embrace in the Senate where earlier in the year (October), the Senate rejected a similar measure designed to stave-off physician fee cuts.  The Senate appears to approve of a pay-as-you-go approach or methodology rather than a wholesale restructuring of the current formula, despite strong sentiment among all Senators and Representatives that the present formula isn’t working.  In reality, the final issue will come down to money and how much the Senate is willing to allocate beyond a one-year fix.  With the House version of reform and the soon to be released Senate version of reform foreshadowing $1 trillion plus spending programs on health care, there may be little political muster left to add an additional long-term debt of $200 plus billion for a more permanent “doc fix”.

November 20, 2009 Posted by | Policy and Politics - Federal | , , , , , , | Leave a comment

Ten SNF Industry Trends to Watch

I am often asked in my profession to “opine” on “what’s going on in this industry or that industry”; give us the trends.  As a matter of fact, this Monday past I spent an hour with a principal from a hedge fund wanting to know “what are the major issues” in the seniors housing and healthcare industry.  His fund needed an industry perspective on what is happening or likely to happen so that they could position their investments strategically and hopefully corollary to the current trends.

I won’t profess to have a crystal ball but I do spend a great deal of time reading publications, working with providers, investors, developers, etc., and listening to trade associations, politicians, and people working in the industry so suffice to say, my insight is generally pretty darn accurate.  In other words, I accumulate and validate a whole lot of data and when I see and hear the same things repeatedly and validate the information, I believe a “trend” is solid.  I’ve compiled my Top Ten for 2009 and early 2010 (and perhaps a bit longer) for the SNF Industry and listed the same below. I’ll do the same for each seniors housing and healthcare segment I cover in upcoming posts.

  1. MDS 3.0:  The reality of RUGs refinement is here and it means big reimbursement changes for therapies in particular.  Many in the industry and particularly contract rehab providers aren’t really prepared and as in all cases with Medicare reimbursement, you snooze you lose – dollars.
  2. Probes and RACs: The Feds are searching for money and they believe that many providers, especially those running higher acuity case mix and  strong Medicare census are billing incorrectly, over-charging, etc.  This recapture activity will continue to heat-up and the goal is to recover Medicare dollars.
  3. Medicaid: The States have budget woes and even though the Feds will kick-in additional dollars including stimulus funds, don’t expect any windfalls coming via Medicaid.  In fact, many states are looking at reducing inflationary increases, raising bed taxes or other provider taxes and pushing through only paltry or meager (if at all) increases – way below the inflationary trends in the industry.  The bottom-line is that the Medicaid losses (shortfalls) will grow wider over the next year and longer.
  4. Medicare: Aside from recovery audits, probes, MDS 3.0, etc. the wind of spending reductions in Medicare for nursing home reimbursement is blowing hard.  MEDPAC and the Congress have come straight out and stated that they believe the industry has been riding a gravy train via Medicare and that they (CMS and Congress) have intentionally let the “surplus” funding via rates go on long enough.  Succinctly stated, they know that Medicare has been funding Medicaid shortfalls and that will end.  Current proposals and discussions include reducing or freezing the market-basket increase, providing a market-basket increase but re-basing the rates and/or combinations of both.  In short, with the healthcare reform movement in full motion, payment for healthcare is front and center and Medicare is an enormous target – for all providers.  The outlook is bleak for this program continuing to be a lucrative, long-term payment source for the industry – certainly not as lucrative as it has been.
  5. Person-Centered Care: A wonderful concept that is turning into a Frankenstein monster via regulators and once again, less than clear interpretations offered via CMS.  The initiatives with person-centered care that will come forth via survey activity are virtually impossible to comply with and so nebulous that enormous survey and compliance inconsistency will occur.  The premise is good but with facilities primarily relying on Medicaid and a certain dwindling Medicare payment as their financial resources, giving every resident what he/she may want when and how they want it will be impossible financially and highly impractical from an operating standpoint.  Being boldly honest, environments can be comfortable, nurturing and safe but a nursing home was never meant to be the same as “someone’s home”.
  6. Regulations and Surveyors: A topic that likely will never leave a top ten list in any year is compliance.  The industry is overrun by nonsensical and increasingly vague regulations.  The system is wildly variable and consistency is far from attainable.  The system does little to promote quality and clearly, based on what I hear and see, promotes increasing numbers of highly qualified staff to leave – especially Directors of Nursing.  In a period when nurses are in short supply and everyone believes that quality needs to be increased, using an outdated system untied to measurable and demonstrable outcome statistics, relying wholly on interpretations (reasonable or unreasonable) from “point-in-time”  inspections and from point-in-time inspectors that may or may not have any direct industry experience is frankly, ludicrous.  Any system that essentially finds guilt, levies fines and provides only an expensive and bureaucratic methodology for arguing whether guilt actually was present at all, is destined to fail in terms of achieving its intent – improved quality and consistency of care.  During this upcoming year or so, where the industry will certainly see declining reimbursement and increased audit and recovery activity, there appears no reduction on the horizon for the endless stream of regulatory insanity that comes from Washington.
  7. Aged Physical Plants: With the cost of new construction being as high as it is and many states using some form of CON (Certificate of Need) or other bed-cap provisions prohibiting increases in new bad capacities, much of the industry is sitting on physical plants that are decades old.  Combine the age of the plants with Medicaid and Medicare reimbursement programs that no longer allow any realistic hope of capital cost recovery (exception programs for these costs were abandoned years ago), there has been little incentive for providers to modernize their physical plants.  The problem however is that the Feds continue to pass unfunded, regulatory mandates in the form of new Life Safety Codes (for example, requiring all buildings to be fully sprinkled by 2013) as well as other environmental regulations (see Person Centered Care) that place the provider with an aged plant at risk for compliance problems.  The primary issue here is that without any recognition of the costs to modernize the older physical plant on behalf the Feds, the revenue flows to update an older plant are scarce at best.  Another complication at present to this problem is the tight capital markets.  Lenders are shy to the industry and capital is scarce and where accessible, prices and terms are steep.  If, and such is the case, capital from borrowing is either too expensive or too difficult to access, another source for plant updating is “off the books”.  While I believe capital will become more accessible to the industry in the near and intermediate future, the economic outlook via rates from Medicare and Medicaid is not rosy thereby still making borrowing for many a tough path to access (lower revenue from reimbursement reduces coverage levels for new debt).
  8. Labor:  This is an industry where 60% to 70% of operating costs are associated with labor.  Reimbursement has not kept up with the increasing costs of labor, the demand for additional staff and types of staff on behalf of patient advocacy groups and regulators, and the increase in regulatory requirements that burden staff, most directly, Directors of Nursing.  Turnover, even in a down economy remains a problem and now the industry is beginning to see real shortages (beyond what has been seen before) in Pharmacists, Physical Therapists, Physicians and Advance Practice Nurses.  To attract and retain this group of professionals, let alone all other skilled professionals, wages, perquisites and benefits have inflated dramatically.  With forecasted actual cuts in reimbursement and/or freezes in rates, the cost of labor will climb ever higher as a percentage of overall revenue.  Additionally, less resources means less dollars available to pay for critical labor that is presently and will remain, in high demand.
  9. Liability: All of healthcare faces a liability crisis in the United States and the SNF industry continues to see its share of problems.  Trial lawyers have “wised” up and are becoming very adept at watching survey results, the five star rating reports put out by CMS and other sources of industry information.  Compounding the problem, there are still too few major liability carriers willing to write business in the industry space and as a result, competition lacks and premium pricing remains artificially higher than perhaps it should.  While more states have moved to place caps and collars on malpractice and liability claims, the whole of the healthcare liability/malpractice issue needs to be addressed with serious and substantive tort reform out of Washington if the industry is to garner any permanent relief.  With a Democratic President who won election supported by the Plaintiff’s Bar and a Democratic Congress that has pandered to this same group, real tort reform necessary to reduce the liability threat level is not likely forthcoming from Washington this year or the next.
  10. The Federal Government: Awash in the healthcare reform debate, Washington and the Feds have drawn the bulls-eye around the U.S. healthcare industry.  In every corridor of power, debate across both parties  is centered on reducing and controlling, healthcare costs.  While this may be a good thing globally, the Feds have shown no ability to exercise discretion and/or common sense in reforming an overly bureaucratic and inanely regulated industry instead, focusing on politics and poorly crafted budget driven policy as a means of “patting themselves on the back” come election time.   There is no question that the Feds will focus on cutting spending via changes in reimbursement while continuing to craft more inane and useless regulations as a means of achieving some “reform” agenda.  In all of my years in the healthcare industry, I have never seen a time that is more concerning and frankly discouraging, when viewed in light of the role the Federal government is playing in healthcare.  I fear that this trend will get worse before it gets better.

June 24, 2009 Posted by | Skilled Nursing | , , , , , , | Leave a comment