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Senior and Post-Acute Healthcare News and Topics

SNF Proposed Rule for 2020

Spring is the time when CMS starts dropping Proposed Rules for various health care provider segments.  This past week or so saw update drops for IRFs, Hospice and SNFs.  Recall, Proposed Rules are administrative law changes that CMS makes to existing provider regulations, typically covering reimbursement and some programmatic policy changes that tie to reimbursement.  Congress does not have to approve or weigh-in other than through the appropriation function, defining the amount of spending globally, allowed under Medicare. The translation thereof to rates, payments, programs, etc. is via CMS rule making authority.  I’ll summarize other industry segments in a follow-up post later in the week.

The SNF proposed rule is best characterized as “mostly” good news.  The best news is the proposed market-basket (rate inflation) update of 3%. Subtracting the productivity factor of .5% from the update, SNFs will see a rate increase of 2.5% starting on October 1 (assuming the rate remains as proposed once the Final Rule is issued).  How this will exactly map to revenue however, is where the “mostly” qualifier is required.

A rate increase is merely an inflationary adjustment to the payment categories under Medicare. In the case of SNFs, the translation will take place in PDPM.  Under RUGs IV, the SNF rates would inflate by the applicable percentage, applied to each of the 66 groups.  Under PDPM, the base rate corresponds to one of six case-mix categories (PT, OT, Speech, Nursing, Non-Therapy Ancillary and Non-Case Mix), multiplied by the applicable case-mix value in each category (excluding non-case mix which is a flat per diem). There are ten clinical categories under PDPM that correspond to the reason that patient is admitted to the SNF (Major Joint Replacement or Spinal Surgery; Cancer; Non‐Surgical Orthopedic/Musculoskeletal; Pulmonary; Orthopedic Surgery (Except Major Joint Replacement or Spinal Surgery); Cardiovascular and Coagulations; Acute Infections; Acute Neurologic; Medical Management; Non‐Orthopedic Surgery).  Using the diagnosis code and patient functional status from Section GG on the MDS, a case-mix value is determined for each of the five categories (not non-case mix).  In the end, it will be difficult for the SNF to see a direct relationship, as in years past, with a rate adjustment and the current (soon to be former RUGs) payment model.  PDPM, even with the best modeling, is an unknown element for the SNF industry.  In short, there is no correlation between this proposed 2.5% increase and what a SNF will see in terms of revenue come October 1.  It is quite possible that some will see, even with the rate increase, a decrease in Medicare total revenue compared to current experience.

Another subtle but important element to consider, one that falls outside of this Medicare policy, is Medicare Advantage.  This Proposed Rule only impacts the fee-for-service side of Medicare, not translating to Medicare Advantage rates paid by plans to SNFs.  Such is the same concerning PDPM.  Medicare Advantage plans do not need to implement rate increases, PDPM or follow CMS reimbursement protocols for any provider segment.  For SNFs that have a high percentage of Medicare Advantage patients as part of their routine census, the impact of this proposed rate increase must be factored against the Medicare Advantage patient volume (e.g., 50% Medicare census that is Med Advantage reduces the rate increase realizable by the SNF, by half).  I am not seeing much rate increase activity on the part of the Medicare Advantage plans in any major market.  The supply of willing SNFs to take their patients exceeds by a large amount, the demand within these plans, for SNF access.  In other words, prices don’t need to increase to gain access, when needed.

Other programmatic updates/changes within the Proposed Rule for SNFs are as follows.

  1. CMS is proposing to align the “Group Therapy” definition for SNFs to the one used for IRFs.  Presently, the SNF definition for group is “four patients”; exactly.  The change will allow “group” to be any number between two and six.  Important Note of Caution: Assuming this definitional change remains, SNFs must not adopt a group therapy practice that immediately accommodates the maximum.  Group is an appropriate therapy treatment option when and only when, clinically warranted by the patients being treated in this setting.  I am hearing way too many therapy companies tout cost control, productivity management, etc. under PDPM via a sweeping expansion of group therapy (not readily usable under the current RUGs system).  Remember, if the SNF patient needs and clinical requirements prior to October 1 were for individual therapy, those same needs will apply post-October 1 and PDPM. CMS has warned providers against wholesale shifts in therapy treatment methodologies and time/minutes (reductions).  Facilities need to be very careful as it is unlikely that their census mix (case mix, acuity, etc.) will change after October 1 and thus, the provision of therapy should be fundamentally the same under PDPM.
  2. The Value-Based Purchasing measurement model for readmissions is shifting from “all cause” to “potentially preventable” as the metric.  As before, CMS is using a two percent withhold in SNF Medicare payments to build a pool for performance incentives under the program.  Sixty percent of the funds withheld will be distributed to high-performing facilities as “a bonus percentage” going forward.  In the first realization of incentives/penalties under VBP, 73% of all SNFs failed to perform at the standardized readmission benchmark and are presently, having their reimbursement reduced on a penalty basis.
  3. The SNF QRP (quality reporting program) is gaining two additional measures: Transfer of health information from the SNF to another provider, and; Transfer of health information from the SNF to the patient.  Both measures are interoperability related designed to impact the flow of information between providers and patients to encourage enhanced productivity and safety.  In addition, CMS proposes to add a number of standardized patient assessment data elements that assess cognitive function and/or mental status, special services, treatments and interventions, medical conditions and comorbidities, impairments, or social determinants of health (race and ethnicity, etc.).  Recall, the SNF QRP imputes a two percent reduction in rate inflation to facilities that don’t report data or stay current.  This means that for this year, a facility can see the rate increase of 2.5% proposed, reduced to .5% for non-reporting.

The full proposed rule is available at this link : https://www.federalregister.gov/documents/2019/04/25/2019-08108/medicare-program-prospective-payment-system-and-consolidated-billing-for-skilled-nursing-facilities

April 22, 2019 Posted by | Uncategorized | , , , , , , , , , , | Leave a comment

The Real Impacts of Poor Quality, Inadequate Compliance and Weak Risk Management

A number of interesting information drops occurred this past week or so reminding me that from time to time, the obvious isn’t always so obvious.  The seniors housing and skilled care industry today is going through a rocky patch.  A solid half of the SNF industry is severely hurting or struggling mightily due to Med Advantage, softer demand, pervasive reliance on Medicaid for census, labor shortages, rising wage pressure, tight Medicare reimbursement, new regulations, etc. (I could elaborate for a stand-alone article).  While not as pervasive in its struggles as the SNF industry, Assisted Living is facing challenges due to softer census, too much capacity, rising resident acuity, labor costs and shortages and gradually increasing regulatory scrutiny.  The relative strength in the overall seniors housing and post-acute sector is home health and independent housing.  Notice, I did say relative as home health demand is good but regulatory over-burden is still present along with tight reimbursement.  Home health is also experiencing labor challenges, the same as SNFs and ALFs.  The relative strength that is found in independent housing tends to be more on the market and sub-market rent side.  Many, many high-end providers are still struggling with census challenges and soft demand in certain markets.

As I have written and counseled many times to investors and clients alike, there is something to learn from the national trends but health care and seniors housing is still, a local reality.  What this means is that in spite of some rocky water for the industry, there are providers that do well and are bullish about their fortune in their respective industry segments.  Not to seem too convoluted, the national trends matter but as I like to think, in the context of what they truly mean.  In this regard, what they truly mean is how the trends impact providers on a macro basis as well as on a micro, behavioral basis.

As I started, this past week or so included some interesting information drops.  The first and not too surprising, is another alarm from a major, publicly traded provider organization that it was on the narrow ledge to failure.  Five Star Senior Living provided notice that given its financial condition now and as forecasted, it would not be able to meet its continuing obligations in the form of debt or timely payment of operating expenses.  When I say half the SNF industry is in battle to survive, I’m not kidding.

In unrelated drops, CNA (the major national commercial insurance provider) released its 2018 Claims Report for Long-Term Care/Senior Living.  The claims in this case are liability related.  Following CNA’s release, Willis Towers Perrin (major insurance brokerage and consultancy firm) provided their outlook for liability insurance noting that Long-Term Care and Seniors Housing should expect liability premium increases of 5% to 30%.  Anecdotally and unrelated, we are seeing steep property/casualty increases in the industry as well due to extreme weather losses over the last twelve to eighteen months.

While not absolute but substantial in nature, there is a direct correlation between providers that are struggling and the quality of care and service they provide to their patients.  The core competencies required to provide superb care are tied directly to compliance and risk management.  I have never seen an organization that delivers excellent care have poor compliance trends (billing, survey, other) and weak risk management leading to high levels of worker’s comp cases, lawsuits, liability insurance claims, etc.  Lately, there is the same correlation developing between quality and financial results.  As more quality payer source referrals and higher reimbursement with incentive payments connect to patient care outcomes, a gap is evident between the providers that are thriving and those that are dying.  That gap is the quality divide.

There is a spiral effect that is visible today in the SNF industry.  This effect has been visible for some time in hospitals.  It occurs as follows.

  • Care delivery is inconsistent and in most cases, not great.  Service is the same.
  • Complaints and survey results demonstrate the same and are reflected in star ratings.
  • Consumers and referral sources catch wind that care is not good.
  • Staff turnover accelerates, including key personnel that take with them, a disparaging message regarding care.
  • Quality mix erodes slightly.  Medicaid census increases as the “next best” alternative to an empty bed.
  • Financial results start eroding and losses occur or come into view.  Cash margins are getting tighter.
  • Expenses become an issue and cuts are necessary.  The cuts are incongruous to improving care.
  • With limited resources, quality suffers even more.  No money is available for capital and equipment upgrades.  Staff morale suffers and staffing levels are lower.  Productivity wanes as morale is poor and patient care follows.
  • Survey results are very poor and fines now happen.  The fines are expensive, removing more resources away from patient care.
  • Costs are growing rapidly related to higher insurance premiums, poor worker’s comp experience, unemployment costs, turnover, and legal costs to defend the facility.  These costs are removing resources away from patient care.
  •  Finally, because the resources are too depleted to make the necessary changes to rebuild quality, staff levels, etc. and no lender is available to front any more capital, the enterprise collapses.  The names are becoming familiar….Signature, ManorCare, Five Star, Genesis, Kindred are all SNF providers whose future is extinction or “almost”.

Arguably it takes money to have and deliver quality.  Equally as arguable today is that without quality, money won’t be made sufficient enough to stave-off failure due to…poor quality.  When quality isn’t the primary objective, compliance and risk management work as dead weights that the organization must carry; and the weight increases over time.  Why this isn’t obvious yet in the post-acute and seniors housing industry is beyond me.  An analogy that  I have used time and time again is the restaurant analogy.  Successful restaurants are laser-focused on their products – food and service.  They know that poor marks in either category or an outbreak of food borne illness can be death to their livelihood. In a crowded market of diners, price or value ties to quality and experience across a myriad of options.  What is common among the restaurants that succeed is their quality meets and exceeds, the customer’s realization of value (getting equal to or more satisfaction for the price paid).  When this occurs, money flows in increments sufficient to reward investors, pay employees, invest in equipment, and to reinvest in the products and services that customers buy.  Simple.

Seniors housing and post-acute care aren’t too different or disparate from the restaurant analogy.  The market is crowded with options…too many actually. Yes, the customer relationships are a bit different but the mechanics and economic levers and realities identical.  Providers that give great care, equal to or higher than the price points/reimbursement levels are GAINING customers via referrals.  The customers they are gaining are coming with good payment sources.  Money in the form of cash flow is strong enough to invest in plant, property, equipment and staff.  Doing so reinforces quality and service and allows the referral cycle to optimize.  As the market continues to shrink in terms of number of providers due to failure, the few that are exceptional continue to see their future and fortune improve.  Again, simple.

What we know is the following and the message should be clear today for those who still can control how they approach and manage their quality and customer experience.

  • Poor quality costs money disproportionately more than the dollars required to deliver “high quality”.  The costs are erosive and ongoing.
    • Higher insurance premiums
    • Poor compliance results with fines (the federal fines today are steep and immediate for SNFs)
    • Higher capital costs (yes lenders are now looking at quality measures as a measure of credit risk)
    • Increased litigation risks which when realized, contribute to higher insurance premiums.
  • All of the reimbursement incentives today and going forward are only available to providers that can deliver high quality, efficient patient outcomes.  Value-based purchasing rewards good care (limited rehospitalizations) and punishes poor care.  The impact is just being seen today and in the years forward, the impact is greater – both ways (reward and punishment).   The same is true under the new and forthcoming, case-mix payment models.  The high quality, adept providers will be able to provide the care rewarded highest, under these new payment models (PDPM, PDGM).  Those that don’t have the clinical infrastructure will languish.
  • Referrals today are more and more, skewed toward quality providers.  With hospitals and narrow networks looking for select post-acute providers that won’t increase their risks in value-based purchasing or bundles/ACOs, poor providers in terms of quality are increasingly seeing diminished referrals.
  • The Plaintiff’s Bar is watching the SNF and seniors housing industry carefully and with optimism.  The CNA report I referenced includes these snippets.
    • 22.6% of closed claims relate to pressure injuries (an almost entirely avoidable negative outcome).
    • Death from or related to pressure injuries is the highest average claim by cost.
    • 14 out of the 15 highest cost claims occurred in for-profit facilities.
    • Assisted Living claims cost more on average than SNF claims.
    • Falls continue to represent the lion share of liability claims – 40+%.  The vast majority tie to SNF care.
    • The frequency of claims is increasing.
    • Independent Living is not immune.  The report contains claim data on fall and pressure injury cases from Independent Living.

While no organization is immune from a law suit, the reality remains that organizations with exemplary quality history, high satisfaction levels, and processes that focus uniquely on the elements of great care and service (staffing levels, staff competency, good management, proper equipment, IT infrastructure, etc.) provide less of a target, if any.  No matter where, negative outcomes still occur but in “quality” organizations, they are an exception.  Because care is primary and service right behind, there is far less of a motivation for patients and families to litigate as by reason, the organization wasn’t negligent.  Again, the connections are rather ‘simple’.

November 16, 2018 Posted by | Assisted Living, Home Health, Senior Housing, Skilled Nursing | , , , , , , , , , , , | Leave a comment

Home Health Final Rule: Rate Increases plus PDGM

While I was in Philadelphia speaking at LeadingAge’s annual conference, CMS released its 2019 Home Health Final Rule.  As I wrote in an earlier post regarding the proposed rule, the topic of interest was/is a new payment model – PDGM.  As has been the case across the post-acute industry, CMS is advancing case-mix models crafted around a simplified patient assessment, less therapy oriented more nursing/medically balanced.  The industry lobbied for modification or delay in PDGM, primarily due to some underlying behavioral assumptions CMS embedded in the proposal (more on this in later paragraphs).

The most relevant, immediate impact of the final rule is rate increases (finally) for the industry – 2.2% or $420 million.  The industry has experienced rate cuts and rebasing consistently since 2010 as a response to fast growth and high profit margins exhibited by companies like Amedysis (the center of a Congressional hearing in 2011).

PDGM is slated to take effect “on or after January 1, 2020”.  The ambiguity in this language is worth noting as there are some that believe modification, even delay is possible.  Compared to the proposed rule, the final rule includes 216 more Home Health Resource Groups due to bifurcating Medication Management Teaching and Assessment from previous group alignments. The following key changes are a result of PDGM.

  1. As with PDPM on the SNF side, PDGM removes the therapy weight/influence separately from the assessment and payment element weights for HHAs.  The clinical indications or nursing considerations are given more weight along with patient comorbidities.
  2. Coding becomes a key factor in payment mechanics, particularly diagnoses and co-morbidity.
  3. Functional status is given a higher weight, as is the case today with all post-acute payment model reforms.
  4. Episode lengths are halved – down from 60 days (current) to 30 days.
  5. PDGM is budget neutral meaning that when fully implemented,, the cost to the Federal government for Medicare HHA payments in the aggregate is no greater than current (inflation adjusted for time).  To get to budget neutrality, certain behavioral assumptions about provide reactions to the changes are used.  As one would suspect, this is a subject of concern and debate by the HHA industry.

The behavioral assumption issue referenced in #5 above is an imputed reality in all payment model changes.  In fact, it is an economic model necessity when attempting to address “how” certain changes in reward (payment) will move activity or behavior toward those places where reward or payment is maximized.  It is a key economic behavioral axiom: What get’s rewarded, get’s done.

In effect, CMS is saying that budget neutrality is achieved for a 30 day episode when payments for the episode equal $1,753.68.  Getting to this number, CMS assumed that agencies would react or respond quickly to payment changes (areas where increases are found) in co-morbidity coding, clinical group assignment and reduction in LUPA cases.  However, if CMS models slower reactions or limited reactions by the industry (operating norms as current persist), the payment impact is an increase of 6.42% or $1,873.91.  Because budget neutrality is mandated concurrent with PDGM, the concerns providers are raising relates to how payments will ultimately be determined and when if necessary, will adjustments be made IF the anticipated behavioral changes don’t manifest as factored.  Simply stated, this collective concern(s) is the reason the industry continues to lobby for delay, more analysis and further definitional clarity with the PDGM funding and payment assumptions prior to implementation.

One final note with respect to PDGM dynamics.  Readers of my articles and attendees at lectures, webinars, other presentations have heard me discuss overall post-acute payment simplification and the movement within Medicare reimbursement to site neutrality.  PDGM is an interesting payment model from the standpoint that it parallels in many ways, the PDPM movement for SNFs.  It is diagnosis based, more clinically/nursing driven than the previous system and more holistic in capturing additional patient characteristics (co-morbidities) than before in order to address payment relevance. With assessment simplification and a growing focus on patient functional status at various points across a post-acute global episode (from hospital discharge to care completion), an overall framework is becoming more visible.  Expect continued work from CMS on payment simplification, more calls from MedPac for site neutral payments for post-acute care. The policy discussions are those that reinforce payment that follows the patient, based on patient clinical needs, unattached to any site dynamics or locations, save perhaps a coding modifier when inpatient care is warranted to account for the capital and equipment elements in the cost of care.  When looking globally at the overall health care payment and policy trend that is occurring sector by sector, the future of payment simplification and movement to site neutrality is certain.  One question remains: By when?

November 6, 2018 Posted by | Home Health, Policy and Politics - Federal | , , , , , , , , , , , , | Leave a comment

Site Neutral Payment Update

In early October, I wrote an article regarding CMS 2019 OPPS (outpatient PPS) proposed rule, specifically regarding site neutral payments.  The purpose of the article was to address the site neutrality trend that CMS is on, streamlining payments to reduced location of care disparities for the same care services.  Succinctly, if the care provided is technically the same but the costs by location are different due to operating and capital requirements, should payments vary?

Yesterday, CMS pushed forward the OPPS final rule, maintaining the concept of site neutrality despite heavy hospital lobbying.  The gist of the rule is as follows.

  • Hospital off-campus outpatient facilities will now be paid the same as physician-owned or independently owned/operated outpatient facilities for clinic visits.  No longer will there be a hospital place-of-care premium attached to the payment.
  • Off campus is defined as 250 yards or more “away” from the hospital campus or a remote location.
  • For CY 2019, the phase-in/transition is a payment reduction equal to 50% of the net difference between the physician fee schedule payment for a clinic visit and the same payment for a hospital locus clinic or outpatient setting.  The amount is equal to 70% of the OPPS (hospital outpatient PPS rate).
  • For CY 2020, the amount paid will be the physician fee schedule amount or 40% of OPPS rate, regardless of location.
  • Final Rule text is here: 2019 OPPS Final Rule

What CMS noted originally as the need stemmed from a Medpac report where a Level 2 echocardiogram cost 141% more in a hospital outpatient setting than in a physician office/clinic setting. This final rule is part of an expected and continuing trend to simplify and streamline payments among provider locations.  Similarly, CMS is following a path or theme laid forth by Medpac concerning payments tied to care services and patient needs rather than settings or places of care.  The 2019 OPPS payment change is a $760 million savings in 2019 expenditures.

Finalization of the OPPS rule with site neutral payments cannot be overlooked in significance. As I wrote in the October article, this is a harbinger of where CMS and Medicare policy makers are heading.  Hospitals lobbied hard and heavy against this implementation claiming a distinction in payment was not only required by dictated by patient care discrepancies.  Alas, there appeared to be no common ground found within that argument.

I suspect now that the door is opened just a touch wider for site neutral post-acute payment proposals to advance.  Under certain case-mix categories, there truly is very little difference in care delivered and no difference in outcomes (adversely so) between SNFs, IRFs, and LTAcHs yet there is wide payment difference.  With lengths of stay declining and occupancy rates the same (declining) among these provider groups, CMS will no doubt (my opinion) push forward a streamlined proposal on site neutral payments in the next three years.  I anticipate the first proposal to concentrate almost exclusively, on SNFs, IRFs and perhaps, some home health case mix categories.  If hospitals can’t budge CMS away from the site neutral path, there is zero likelihood that IRFs and LTAcHs can divert CMS from site neutral proposals in the near future.

 

November 2, 2018 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , | Leave a comment

Post-Acute, Site Neutral Payment Upcoming?

In the 2019 OPPS (outpatient PPS) proposed rule, CMS included a site neutral payment provision.  With the comment period closed, the lobbying (against) fierce, it will be interesting to see where CMS lands in terms of the final OPPS rule – maintain, change, or abate.  The one thing that is for certain, regardless of the fate of this provision, site neutral proposals/provisions are advancing.

CMS has advanced a series of conceptually similar approaches to payment reform.  Site neutral approaches are a twist on value-based care as they seek to reward the efficiency of care by de-emphasizing a setting value.  This is loosely an approach to “payment follows the patient” rather than the payment is dictated by the locus of care.  Assuming, which isn’t always in evidence, that for many if not most outpatient procedures, the care required is the same such that one setting vs. another isn’t impactful to the outcome, then a site neutral payment seems logical.  Managed care companies have been using this approach overtly, attaching higher cost-share to certain sites or eliminating payment altogether for procedures done in higher cost settings. In the OPPS proposal, the savings is rather substantial – $760 million spread between provider payments and patient savings (deductibles).  To most policy watchers, there is a watershed moment possible with this proposal and its fate.  The fundamental question yet resolved is whether hospitals will continue to have a favorable payment nuance over physician practices and free-standing outpatient providers.  Hospitals arguing that their administrative burden and infrastructure required overhead, combined with patient differences (sicker, older patients trend hospital vs. younger, less debilitated patients trending free-standing locations), necessitates a site different payment model (such as current).

In the post-acute space, payment site neutrality has been bandied about by MedPAC for some time.  Up to now, the concept of payment site neutrality has languished due to disparate payment systems in provider niches’.  SNFs and their RUGs markedly different from Home Health and its OASIS and no similarity with LTACHs in the least. Now, with post-acute payments narrowing conceptually on “patient-driven” models (PDPM and PDGM) that use diagnoses and case-mix as payment levers, its possible CMS is setting a framework to site neutral payments in post-acute settings.

In its March 2015 report to Congress, MedPAC called for CMS to create site neutrality for certain patient types between SNFs and IRFs (Inpatient Rehab Facilities).   While both have separate PPS systems for payment, the IRF payment is typically more generous than the SNF payment, though care may look very similar in certain cases.  For IRFs, payment is based on the need/extent of rehab services then modified by the presence or lack of co-morbidities.  IRFs however, have payment enhancements/ additions for high-cost outliers and treating low-income patients; neither applies in the SNF setting.

The lines of care distinction between the two providers today, certainly between the post-acute focused SNFs and an IRF, can be difficult to discern.  For example, both typically staff a full complement of therapists (PT, OT, Speech), care oversight by an RN 24 hours per day, physician engagement daily or up to three times per week, etc.  Where IRFs used to distinguish themselves by providing three hours (or more) of therapy, SNFs today can and do, provide the same level.  As a good percentage of seniors are unable to tolerate the IRF therapy service levels, SNFs offer enhanced flexibility in care delivery as their payment is not predicated (directly) on care intensity.  What is known is that the payment amounts for comparable patient encounters are quite different.  For example, a stroke patient treated in an IRF vs. an SNF runs $5,000 plus higher.  An orthopedic case involving joint replacement differs by $4,000 or more.  Per MedPAC the difference in outcomes is negligible, if at all.  From the MedPac perspective, equalized payments for strokes, major joint replacements and hip/femur related surgical conditions (e.g., fracture) between IRFs and SNFs made sense, at least on a “beta” basis.  With no rule making authority, MedPac’s recommendation stalled and today, may be somewhat sidelined by other value-based concepts such as bundled payments (CJR for example).

So the question that begs is whether site neutral payments are near or far on the horizon for post-acute providers.  While this will sound like “bet-hedging”, I’ll claim the mid-term area, identifying sooner rather than later.  Consider the following.

  • Post-acute care is the fastest growing, reimbursed segment of health care by Medicare.
  • The landscape is changing dramatically as Medicare Advantage plans have shifted historic utilization patterns (shorter stays, avoidance of inpatient stays for certain procedures, etc.).
  • Medicare Advantage days as a percentage of total reimbursed days under Medicare are growing. One-third of all Medicare beneficiaries were enrolled in a Medicare Advantage plan in 2017.  Executives at United Healthcare believe that Medicare Advantage penetration will eclipse 50% in the next 5 to 10 years.  As more Boomers enter Medicare eligibility age, their familiarity with managed care and the companies thereto plus general favorability with the product makes them quick converts to Medicare Advantage.
  • Managed care has to a certain extent, created site preference and site based value payment approaches already.  There is market familiarity for steering beneficiaries to certain sites and/or away from higher cost locations.  The market has come to accept a certain amount of inherent rationing and price-induced controls.
  • At the floor of recent payment system changes forthcoming is an underlying common-thread: Diagnoses driven, case-mix coordinated payments.  PDPM and PDGM are more alike in approach than different.  IRFs already embrace a modified case-mix, diagnoses sensitive payment system. Can homogenization among these be all that far away?
  • There are no supply shortage or access problems for patients.  In fact, the SNF industry could and should shrink by about a third over the next five years, just to rationalize supply to demand and improve occupancy fortunes.  There is no home health shortage, save that which is temporary due to staffing issues in certain regions (growth limited by available labor rather than bricks and mortar or outlets). Per MedPac, the average IRF occupancy rate pre-2017 was 65%.  It has not grown since.  In fact, the Medicare utilization of IRFs for certain conditions such as other neurologic and stroke (the highest utilization category) has declined. (Note: In 2004 CMS heightened enforcement of compliance thresholds for IRFs and as a result, utilization under Medicare has shrunk).
  • Despite payment reductions, Home Health has grown steadily as has other non-Medicare outlets for post-acute care (e.g., Assisted Living and non-medical/non-Medicare home health services).  Though the growth in non-Medicare post-acute services has caused some alarm due to lax regulations, CMS sees this trend favorably as it is non-reimbursed and generally, patient preferred.
  • Demonstration projects that are value-based and evidence of payment following the patient or “episode based” rather than “site based” are showing favorable results.  In general, utilization of higher cost sites is down, costs are down, and patient outcomes and satisfaction are as good if not better, than the current fee-for-service market.  Granted, there are patient exceptions by diagnoses and co-morbidity but as a general rule, leaving certain patients as outliers, the results suggest a flatter, site neutral payment is feasible.

If there is somewhat of  a “crystal ball” preview, it just may be in the fate of the OPPS site neutral proposal.  I think the direction is unequivocal but timing is everything.  My prediction: Site neutral payments certainly, between IRFs and SNFs are on the near horizon (within three years) and overall movement toward payments that follow the patient by case-mix category and diagnoses are within the next five to seven years.

October 2, 2018 Posted by | Home Health, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , , , , , , | Leave a comment

CMS Final SNF PPS Rule for 2019: Increases plus PDPM

Late this afternoon, I caught news that CMS will release a number of Final Rules impacting post-acute providers over the next few days.  Below is a quick summary of what is known for SNFs.  I will update this information as I get access to the Final Rule.

  • PPS rates (manual) to adjust by 2.4% (increase).
  • A final version of PDPM is included in the Final Rule.  Implementation steps including dates won’t be known until the Final Rule is issued and likely, there will still be some “fill-in-the-blanks” that will be later developed and issued. The good news is that the assessment and documentation changes that were part of the PDPM proposal remain.
  • There will be some quality measure changes forthcoming as CMS’ Meaningful Measure Initiative is tasked with weighing cost vs. benefit across provider measures.  It will be some time however, before it is clear which measure changes will occur and the impact.  Important to know: Changes in meaningful measures impact QRP and ultimately, Value Based Purchasing/Pay for Performance for providers.  It is important that SNFs pay close attention to these measures as their use is beyond reporting; now reimbursement correlated and compliance correlated as well (new survey process is very similar in many ways to QIS – data driven).

More information on this topic once the Final Rule is public.

July 31, 2018 Posted by | Uncategorized | , , , , , , , , , , | Leave a comment

Home Health and Hospice: Strategic Movement in an Evolving Market

Last year 2017, was a bit of a “downer” in terms of mergers/acquisitions in the home health and hospice industry.  Though 2017 was fluid for hospital and health system activity, the home health and hospice sectors lagged a bit.  Some of the lag was due to capacity concerns in so much that health system mergers, if they involve home health as part of the “roll-up”, take a bit of sorting out time to adjust to market capacity changes (in markets impacted by the consolidations).  The additional drag was attributable to CMS proposing to change the home health payment from a per visit function to a process driven by patient characteristics – after implementation, a net $950 million revenue cut to the industry.  CMS has since scrapped this proposed payment revision however, the future foreshadows payment revisions nonetheless including changing to some format of a shorter episode window for payment (ala 30 days).

Hospice has always been a bit of niche in terms of the post-acute industry.  Where consolidation and merger/acquisition activity occurs, it is most often fueled by a companion home health transaction.  De Novo hospice “only” activity of any scale has been steady and unremarkable, save regional and local movement.  From a reimbursement and policy implication standpoint, hospice has been far less volatile than home health.  Minor changes in terms of scaling payment levels by length of stay have only marginally impacted the revenue profile of the industry.  What continues to impact hospice patient flow is the medical/health care culture within the U.S. that continues to be in steep denial regarding the role of palliative medicine/care and end-of-life care, particularly for advanced age seniors.  Sadly, too many seniors still pass daily in expensive, inpatient settings such as hospitals and nursing homes (hospitals more so), racking up bills for (basically) futile healthcare services.  If and when this culture shifts, hospice will see expansion in the form of referrals and post-acute market share.

Despite somewhat (of) a tepid M&A climate in 2017, the tail-end of the year and early 2018 provided some fireworks.  Early 2018 is off to the races with some fairly large-scale consolidations.  In late 2017, LHC group and Almost Family announced their merger, recently completed.  Preceding this transaction in August, Christus Health in Texas formed a joint venture with LHC, encompassing its home health and hospice business (LTAcH too).  Tenet sold its home health business to Amedysis (though not a major transaction by any means).  And, Humana stepped forward to acquire Kindred’s Home Health business.

In the first months of 2018, Jordan, a regional home health and hospice business in Texas,  Oklahoma, Missouri and Arkansas, announced a merger with fellow regional providers Great Lakes and National Home Health Care.  The combined company will span 15 states with over 200 locations.  In other regions, The Ensign Group, primarily a nursing home and assisted living provider continues to expand into home health and hospice via acquisitions; primarily underperforming outlets that have market depth and need restructuring.  Former home health giant Amedysis continues to redefine its role in the industry via additions of agencies/outlets in states like Kentucky.  Amedysis, once the largest home health provider in the nation, fell prey to congressional inquiries and regulatory oversight regarding suspected over-payments and billing improprieties.  Having worked through these issues and shrinking its agency/outlet platform to a leaner, more core and manageable level, Amedysis is now growing again, though less for “bigger” sake, more for strategy sake.

Given the preceding news, some trends are emerging for home health in particular and a bit (quite a bit) less so for hospice.  Interestingly, one of the trends apparent for home health has been present for hospitals, health systems, and now starting, skilled nursing: there is too much capacity, somewhat misaligned with where the market needs exist.  I believe this issue also exists for Seniors Housing (see related post at https://wp.me/ptUlY-nA ) but the drivers are different as limited regulation and payment dynamics are at play for Seniors Housing.  While home health is no doubt, an industry with continued growth potential as more post-acute payment and policy drivers favor home care and outpatient over institutional options, capacity problems still exist.  By capacity I mean too many providers wrongly positioned within certain markets and not enough providers properly positioned to deliver more integrated elements of acute and post-acute, transitional services in expanding markets (e.g., Washington D.C., Denver, Dallas, etc.).

Prior to their final consolidation with Humana, Kindred provided an investor presentation explaining their rationale for exiting the home health business (somewhat analogous to their exit rationale from skilled nursing).  The salient pages are available at this link: Kindred Investor Pres 2 18 . Fundamentally, I think the underpinnings of the argument beginning with the public policy and reimbursement dynamics which are extrapolated against a “worse-case” backdrop (MedPac recommendations don’t equate to Congressional action directly nor do tax cuts equate directly to Medicare reimbursement cuts) get lost to the real reason Kindred exited: excess leverage.  Kindred was overly leveraged and as we have seen with all too many like/analogous scenarios, excessive overhead and fixed costs in a tight and competitive market with sticky reimbursement dynamics and risk concentration on Medicare beget few strategic options other than shrink or exit.

With the backdrop set, the home health environment is at an evolutionary pass – the fork-in-the-road applies for many providers: bigger in scale or focused regionally with more network alignment required (aka strategic partnerships).  I think the following is safe to conclude, at least for this first half of 2018.

  • The M&A driver today is strategy and market, less financial.  While financial concerns remain due to some funky (technical term) policy dynamics and reimbursement unknowns, the same are more tame than 12-18 months ago.  To be certain, financial gain expectations are part of every transaction, just less impactful in terms of motivation.
  • The dominant strategic driver is network alignment: being where the referrals are.  The next driver is “positioning” as a player managing population health dynamics.  Disease management focus is key here.
  • Medicare Advantage penetration is re-balancing patient flow in many markets.  As the penetration escalates above 50% (half or better of all Med A days coming from Med Advantage), the referral flows are shaping to more demand for in-home care (away from institutional settings), shorter lengths of stay across all post-acute segments, increasing complexity and acuity on transition, and pay-for-performance dynamics on outcomes (particularly, re-hospitalization).
  • Market locations are key and very, very strategic.  With home health, being able to channel productivity, especially in a low labor supply/high demand environment, is imperative.  Being proximal to referrals, being tight with geographic boundaries, being able to lever staff resources, and being able to deploy technology to enhance efficiency is operationally, imperative.
  • Partnerships are synergistic today and in-flux.  It used to be that a key partner was an acute hospital.  Today, the acute hospital remains important but not necessarily, primary.  With physicians starting to embrace ACOs and Bundled Payment models, the referral relationship most preferred may be direct agency to doctor.  In fact, the hospital partner may not be anywhere near as valuable as the surgical center partner, owned and controlled by physicians.
  • Capacity and capability to bear risk from a population management perspective and to accept patients with higher acuity needs (in-home) and broader chronic conditions.  Effectively, home health agencies are going to continue to feel pressure to take patients with multiple chronic needs and comorbidities and to coordinate these care needs across perhaps, two to three provider spectrums (outpatient, specialty physicians, hospice if required, etc.).

 

May 23, 2018 Posted by | Home Health, Hospice | , , , , , , , , , , | Leave a comment

Is a Paradigm Shift Starting in Senior Living?

A number of years ago, post-acute/senior living analysts, etc. started warning of a coming paradigm shift for skilled nursing and home health.  I started writing and advising about this shift well over a decade ago.  The signs were obvious.

  • Rapid expenditure growth as a percentage of Medicare/Medicaid outlays.
  • MedPac warnings to Congress of rising profit margins in these industry segments.
  • Increasing reports from the OIG and other agencies substantiating billing abuse and likely, widespread fraud.
  • Rapid agency and outlet growth.
  • Rising per unit prices and cap rates.
  • For SNFs REIT deals and rental rates that were clearly, unsustainable given the market conditions and policy trends.
  • Overall reimbursement dynamics including passage of the Affordable Care Act that foretold stable to shrinking Medicare reimbursement.
  • Increasing Medicare Advantage penetration.
  • Increasing Medicaid funding problems at the state level and increasing conversions of state programs to Managed Medicaid platforms.

The handwriting was on the wall and even without a clear crystal ball, I began warning those that would listen (from clients to students to industry watchers) that the post-acute provider segments of SNF and Home Health would face stiff headwinds and the unprepared and unimaginative, suffer losses and operating struggles unlike any in recent times.  As much as I loathe the “I told you so” speeches or references, the proof today is in the news constantly.  One need (only) reference Genesis, HCR/ManorCare, Skyline, Signature, Kindred, Amedysis, Gentiva, etc. (I could go on) now versus ten years ago (or less) for validation.  The paradigm of ratchet-up fee for service Medicare encounters, particularly therapy related, increase outlet span, more is better, bigger is better, don’t worry about quality metrics, and find ways to minimize top line operating costs, etc. ended with a resounding THUD (you (and I) knew it would).

To the question posed as the title: Is Seniors Housing/Living starting a similar paradigm shift?  Because such shifts start gradual and pick up momentum as the “trend” winds strengthen, its easy to claim “no” or to ignore the bits and pieces that are the harbingers; a nod to a point-in-time. Lately, I have had an increasing number of conversations with learned folks and those heavily invested in the “housing” elements (independent and assisted) of senior living.  To a one, they all remained bullish for principally ONE reason – demographics.  Each points forward to a rising or swelling tide of senior citizens; byproduct of the great Baby Boom. With confidence, I hear an argument for a demand proposition that current and even near term supply, won’t meet.  This is in spite of the current reality that supply is greater than demand and occupancy is declining consistently, not increasing.  The Brookdale argument is thus: Give it time, the residents are coming and occupancy will improve.  I am skeptical.

The economist in me is uncertain that other factors aren’t more in-play than accounted for or buffered by the “demographics” justification.  For example, the notion that this Baby Boomer customer is the same customer that has been consuming and driving the current seniors housing paradigm is I’ll argue, a false premise.  Their sheer numbers alone won’t guarantee supply consumption.  Students of economics and history will find lessons aplenty such as the death of steam locomotion, coal power generation (though not fully dead), wired television, cassette format video and audio, etc.  The customer bases for these products or industries never shrunk and in fact, they grew in number and purchasing power.  Other dynamics shifted the demand curve ever so slightly for alternatives initially, then rapidly as the same came to the market and price points shifted. The fallacy is that demographics by number alone mean a sustainable market.

Seniors housing has a very elastic demand curve.  The crux of price elasticity is that the greater or higher the price, the smaller the number of buyers.  For the demographics of the coming wave of future seniors to be a demand boon for seniors housing, they (the seniors) must have purchasing power to consume the supply of product at the price levels current and future.  This group must also have limited or no more than present, alternatives to the product (a fixed base residence).  As their power to consume is measured by wealth, wealthier folks demand more alternatives and have more options.  For example, a woman with a million dollar net worth and a $200,000 annual income can arguably buy 90% of the new automobile models (personal use) produced in a given year. She may buy a Rolls Royce or a Honda Fit.  A woman with a ten thousand dollar net worth and a $20,000 annual income probably can’t buy any of the new automobile models and will need to use public transportation or acquire a very, very used car. As is the economic constant, shifts in wealth and substitution products across the price spectrum will influence supply or products and the prices thereof.  Today, there is a bit of a supply inequity in seniors housing and as such, occupancy has trended down.

The supply inequity is seen via the homogeneity of the product, especially product that has come on the market within the last decade.  Where occupancy is consistently high, the product is market or less than market, priced.  Value-based products with or without services are more occupied than their above market competitors today.  Fewer in number, their supply is consumed plus and in constant demand.  I know today of no market or below market (subsidized or rent controlled) seniors housing that is good condition, in a good location (not crime ridden, etc.) that isn’t full or close to full – constantly.

To be clear, I am not anti or even really too bearish (yet) about seniors housing, assisted or independent.  I was never totally bearish about the SNF and Home Health sector, just the paradigm that was operative.  I believe that strategically aligned, market-sensitive product and providers will always do well.  Unfortunately however, I also believe that too many seniors housing units and operators are “me too” driven, emphasizing a “same-same” approach.  I find it hard to believe that the look-alike, feel alike, same amenities, different location or even similar location can be justified by “coming” demographics when similar providers, at similar price-points are at five-year occupancy lows.  All too often, I am reminded of conversations I had with SNF operators telling me their justification for acquisition and the price per bed paid was: “We are different.  We’re going to drive Medicare census to 40 plus percent, raise acuity and RUG levels, utilize technology to be superefficient, etc.”  And when I would say “how” and show me where “you” had done this before and maintained high-quality, etc. and negotiated far better rates with the growing Medicare Advantage market, I got the typical ‘ignore’ response.  Suffice to say, I was never proven wrong.

Because I will be asked, here’s what I am seeing that suggests the beginning of a paradigm shift for seniors housing – biggest for Assisted Living but still palpable and impactful for Independent Living.

  • While the demographics are good, the economics of the demographics are not as good.  Baby Boomers will simply not have the same economic wealth and thus purchasing power of their parents and grandparents.  While some will have done well, the decades of their work and maturation cycle did not see the same kind of wealth and economic expansion that occurred for their parents.  One simple measure very much tied to seniors housing is worth review – residential real estate.  Most Boomers will have had multiple homes and have consumed large portions of their equity to “buy-up” or to adjust lifestyle.  Their parents did not (home equity loans didn’t exist).  Most Boomers also will have started with a more expensive home basis than their parents and thus, will not see the value appreciation.  For example, I know many seniors that bought their home for $40K and sold it for $400K – appreciation of ten-fold.  For a $100,000 Boomer investment to reap the same, the appreciation would need to be $1,000,000.  This is just price.  If I factored in life-cycle cost, the net is far worse (higher interest rates, taxes, etc. over the ownership period).
  • Seniors housing is not getting cheaper.  In many regards, driven by market forces to be more opulent, bigger, better, more amenities, etc., it is getting more price inefficient (cost per square foot needed to sustain).  As the price rises, the product demand becomes more elastic and the number of consumers economically capable of consuming, fewer.
  • Alternative products are increasing and ala carte service providers, expanding. Where staying “at-home” was not much of an option a decade or so ago, it is becoming easier with technology and  service availability that suppports, aging in-place.
  • Planned development communities that are geared toward active, younger seniors are consuming a market segment between 65 and 80.  These communities have club houses, maintenance services, etc., and are typified by private homes, developed to accommodate early level disabilities (no stairs, grab bars in bathrooms, etc.).
  • Because of the point prior, the migration age to seniors housing is increasing accompanied by additional disability.  The more frail and disabled this cohort becomes, the more difficult it is for the provider to keep costs low as operations must support the true needs of the resident.  This is a real problem for Assisted Living as occupancy today is often predicated on catering to a much more frail and debilitated client, many who as little as five years prior, would have resided in a nursing facility.
  • Lastly, the market trends and information are illustrative of the harbingers of a paradigm shift.
    • Weakening cap rates and per unit values
    • Over-built markets with product, still coming into a market already below 90% occupied and trending lower.
    • Brookdale  (enough said)
    • Chinese investors pulling back from the sector – more cautious investing
    • Period over period occupancy declines in the industry – Assisted now at just over 85%!
    • Per NIC 22 of the top 31 markets saw occupancy decline, quarter over quarter
    • Rising cost of capital and fewer starts (finally).  This may actually be a good thing as the sector needs some leveling forces.
    • Rising labor costs.  Again, this may be a good thing.
    • Federal and state-to-state pressure for Assisted Living regulatory actions.  Again, this may be a good thing as too many ALFs are over their-skis in terms of capability to take care of their resident populations.
    • For providers reliant on Medicaid-waiver clients to bolster occupancy, we are seeing rate “reductions” consistently in these programs and know of more to come (no increases yet).

In an upcoming article, I’ll offer some thought on what is working and why and where the market will be for seniors housing and why over the next decade or two.

 

April 26, 2018 Posted by | Assisted Living, Senior Housing | , , , , , , , , , , | 1 Comment

SNFs and the Medicaid Conundrum

What do Morningside Ministries in San Antonio, Genesis Healthcare, Signature Healthcare, HCR ManorCare, and Syverson Health and Rehab in Wisconsin have in common?  Answer: A terminal relationship with Medicaid. While Genesis isn’t “dead” yet, it is fundamentally on life support with a stock price of $1.50 per share and a Medicaid payer mix averaging 73%.  HCR ManorCare is in bankruptcy. Morningside Ministries closed a facility in San Antonio as it simply could not survive on the Texas Medicaid payment at its Chandler Estate facility.  Syverson in Wisconsin is among a slow growing list of SNFs that cannot financially exist under Wisconsin’s Medicaid system – the poorest payer in relation to cost in the nation.

For the vast majority of SNFs nationwide, Medicaid is a conundrum; a Catch 22 of epic proportion.  It is by far, the dominant payer source for LTC among the elderly and thus, the largest payment source for SNF residents when they enter an SNF or fall back on, shortly (typically within 6 months) after their admission.  For the average SNF (and majority of the universe), an unwillingness to openly accept a Medicaid resident equates to an empty bed and no (zero) revenue.  This phenomenon is the Medicaid conundrum – damned if you do, damned if you don’t scenario.

Few SNFs have the reputational excellence, the referral base, capacity limitation and payer source alternatives to minimize or limit, their Medicaid admissions.  Those that do typically are less than 75 beds in capacity and all private rooms, located within an affluent or fairly affluent community, are attached or part of a referral source such as a retirement community or a hospital system, have high star ratings and a good survey/compliance history, and have strong amenity features and equally strong customer reviews/experiences to market.  In such rare or atypical circumstances, the facility is able to control its Medicaid exposure to less than a third of its payer mix.

At greater than a third or so of its payer mix, the SNF is forced to undertake operational strategies and approaches anathema to resident interests and thus, business stability.  First, the SNF must minimize its fixed expenses if possible.  In organizations/facilities where rent payments and debt payments were high comparatively and no opportunity to reduce these payments available, the SNF was vulnerable to any vacancy and to any substantive changes in other payer sources.  This is the demise scenario for HCR ManorCare, Signature and Genesis. Too much of their revenue component was allocated to fixed rent/occupancy costs.

Second, with high Medicaid census, the SNF is forced to be vigilant on variable expenses, predominantly staffing hours and staff mix (professional licensed to unlicensed).  While expense vigilance is good in any business, SNF staff to resident ratios (gross) and by acuity adjusted, are corollary to good care results.  Too few staff, care suffers.  Too few licensed staff and care really suffers.  Today, the regulatory/compliance environment is keenly focused on staff numbers, compliments by license, and competency levels.  In fact, the Phase II implementation of the new(er) COPs for SNFs (new since fall 2016) require facilities to conduct an assessment of resident care needs and conditions and to assure that the same are matched with staff adequate in number and competence to provide care for identified needs and conditions.  Citations today, classified as jeopardy or actual harm, come with instant fines/forfeitures attached, starting at the date of the violation.  It does not take long for an Immediate Jeopardy citation to accumulate a fine of tens of thousands of dollars.

Third, higher Medicaid census requires revenue offsets via other payers such as private insurance, private pay (resident funds), and/or Medicare and Medicare replacement.  The Catch 22 is that the higher the Medicaid census, the greater the reliance the facility has on these other payers.  A facility thus, experiencing any kind of quality or reputation problems, will experience difficulty attracting these higher payers, in sufficient number, to offset the Medicaid “payment effect”.  Vacancies increase and feeling pressure that any occupant is better than none, Medicaid census slowly increases.  Depending on the fixed cost level for the facility, coverage of rent or debt may become problematic (Signature, Genesis, etc.) whereby the attainable EBITDAR is less than the rent or occupancy payment due (coverage below 1).

For the large majority of the industry, the Medicaid Conundrum is worsening as the overall revenue perspective/outlook tightens while operating costs are slowly but steadily increasing, due to:

  • Wage inflation.  An improving economy and employment outlook at the $15 an hour and under labor strata has place wage pressure on SNFs.  The lower to middle end of the SNF workforce is in high demand in many markets meaning that employers are competing for the same basic labor hours across multiple industries.  A typical SNF CNA may find today, equal or better wage opportunities at a Costco or Wal-Mart with “better” working conditions (no customer fannies to wipe, drool to manage, etc.), less physical demanding and more “fun” in terms of atmosphere.  Given the 24 hour/365 labor demands of a SNF, a $.50 increase in hourly compensation can quickly equate to     in a 100 occupied bed facility.  If the facility is in Missouri or Kansas, this increase in operating cost is juxtaposed with a Medicaid rate cut.
  • New Conditions of Participation for SNFs (federal regulations) are phasing in and the cost of compliance is increasing.  Regulatory requirements for facility assessments that drive staff hours and mix plus more emphasis on documentation, training, physician and pharmacy engagement, etc. are adding to operating cost.  Again, this is occurring while rates are flat or in some states, decreasing.

And, while operating costs are slowly increasing, revenue make-up/alternatives to Medicaid are eroding.

  • Other payment sources, particularly Medicare, are not increasing fast enough (if at all), to soak-up the expense increase or Medicaid rate reduction.  In the case of Medicare, an increasing number of SNF days are paid for by Medicare Advantage (replacement) plans.  These plans do not operate EXACTLY like fee-for-service Medicare in so much that they may pay less per diem (and do) and may manage utilization (length of stay) to minimize overall expenditure risk of the plan.  In some markets, the Medicare Advantage beneficiaries are equal to or greater in number for an SNF than the fee-for-service beneficiaries.
  • Shifting care and referral pattern trends have reduced the overall need for a utilization thereto, of SNF beds.  Simply, there is less overall demand for SNF beds than total supply.  Occupancy levels nationally have shrunk year over year for the past decade and additional shrinkage is forecasted until closures reduce supply closer to demand.  In certain areas, the supply may be as much as one-third greater than the demand/need.  Medicaid waiver programs that now pay for community based housing alternatives (Assisted Living and support services) have dented demand along with a shift in post-acute referral to outpatient and home health for non-complicated, orthopedic rehabilitation post surgery.

For the SNF industry, Medicaid has become an addiction no different from nicotine.  Facilities simply cannot survive without it yet it is ruining their health (operationally).  The alternatives to Medicaid are to close shop.  The facilities most reliant, cannot break the cycle as the steps necessary to rebase and retool an SNF revenue and quality model are expensive and long.  Genesis will not get there.  HCR ManorCare couldn’t and didn’t.  The damage of too high of fixed costs and too much reliance on government reimbursement, particularly Medicaid and then an increasing Medicare rate to offset the loss, was a Fools Paradox after all.

Ending this cyclical nightmare is going to require forces and changes to the current paradigm that are yet, on the drawing board.

  • Wholesale changes to the Medicaid funding process are required.  Either more money must flow into the system from the Federal side or the State side (less likely) or the product cost must reduce (see next point).
  • The biggest driver of product cost for an SNF is regulation.  Without wholesale regulatory reform, it is unlikely the system (Medicaid) can find enough funding to adequately compensate an SNF for the cost of care.  The net will be poorer care (calling for thus, more regulation) or more closures leaving service gaps for the most vulnerable older adults.
  • Increasing advances in different product/service options and designs that are cheaper alternatives to institutional care can and will, continue.  Again, speeding the implementation of alternatives requires incentive and regulatory reform but there is no question, certain home and community based options are cheaper than SNF options.
  • Closure of poor performing facilities and constriction on supply is needed.  The industry must shrink and government needs to take an active role to reduce the overall supply and particularly, the supply tied to poor performing facilities.  Fewer beds equal higher occupancy, more efficiencies and enhance funding options (easier to derive funding models tied to actual, organic demand vs. tied to bed capacity and “forecasts” based on flawed assumptions of days of care).

Until these steps are taken, the conundrum will remain entrenched and most facilities, will continue to wrestle with Medicaid addiction problems.  Cold turkey is not an option for nearly all and when no hope remains, facility demise will continue to be the final resort.  Watchers of my home state of Wisconsin will see the most tragic examples as the state has a thriving economy, low unemployment and the worst Medicaid system in the nation.  With paltry additions of funding like 2%, when costs are climbing by double, more closures are certain.

March 30, 2018 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , | Leave a comment

SNF Outlook: 2018/2019

As 2017 closed, a number of projects kept me busy right up to the Christmas holiday.  Among these projects was a focus on the SNF industry current and its fortunes going forward, principally driven by clients in the investment industry.  With REIT troubles, portfolio defaults on the part of HCR and Consulate, Sabra divesting Genesis facilities and Genesis completely exiting Iowa, Missouri, Nebraska and Kansas plus nervousness over rising debt levels and increasing operating expenses (before interest/debt and rent) at Ensign, there is growing concern about “blood in the water”….and when (do) the sharks arrive, particularly for REITs which hold a large number of the physical SNF assets. Back in May of 2017 I wrote a post on the Kindred, HCR, REITs and where the SNF industry was headed.  Readers can refresh here: https://wp.me/ptUlY-m7 . For this post, its time to re-examine the industry economically and structurally and the policy and industry dynamics at-play that will affect the fortunes of the SNFs and the firms that invest in them or the industry.

First, its important to understand the general health policy and reimbursement dynamics at-play in the SNF industry.

  • Phase II Transition of  New SNF Conditions of Participation: Starting in December of 2017, the Phase II survey requirements began corollary to the new SNF Conditions of Participation.  Given a fairly aggressive industry lobbying push to CMS and the Trump Administration with respect to “regulatory overreach and burden”, CMS eased compliance requirements but did not abate any survey or compliance requirements related to Phase II.  In easing compliance requirements, CMS agreed to not impose remedies for Phase II non-compliance and not to impact Star Ratings under the Inspections component for one year.  Given how many SNFs are struggling already with compliance issues and the cost of implementation and compliance, a one-year hiatus for remedies isn’t much of a reprieve.
  • Value-Based Purchasing: Beginning in October of 2018 (FY 2019), SNFs with poor performance (below the target) on the 30 day readmission elements measured under VBR will see their Medicare reimbursement reduced by 2%.  Conversely, high-performing facilities will see a modest incentive, up to 2%, added to their reimbursement.
  • Medicare: In addition to a reimbursement outlook that is flat, a new looming specter has appeared known as RCS-1.  RCS-1 is the proposed new resident classification system for reimbursement for SNFs.  If CMS pushes forward on the time table noted in the proposed rule, the first phase of changes could begin as early as October of 2018 (FY 2019).  For SNFs that rely heavily on the rehabilitation RUGs in the present PPS system, the transition could be expensive and painful as therapy in the new system is UNDER rewarded in terms of “more equaling more payment” and a premium is placed on the overall case-mix including nursing, of the SNF’s Medicare population.  Further, lengths of stays are targeted for shortening as the reimbursement model under RCS-1 reduces payment by 1% per day as the resident’s stay progresses beyond the 15th day.  While the proposed model is “expenditure neutral” per CMS, there will be clear winners and losers.  Winners are facilities that have a balanced Medicare “book” or case-mix (nursing and therapy).  Losers are the facilities that have parlayed the “more minute, longer length of stay system”, focused on the highest therapy paying RUG categories.  These categories evaporate and the payment mechanics with them.
  • Medicaid: This payment source continues to be a revenue center nightmare for most SNFs in most states.  Medicaid underpays as a general rule, an SNF, compared to its daily cost of care for an average resident. As a result, the net loss an SNF will achieve for each Medicaid resident day can be minimal to jaw dropping (depending on the State).  For example, in Wisconsin, the average loss per Medicaid day exceeds $55.00.  This means that for every day of care reimbursed by Medicaid, an SNF must make-up via other payers, the $55.00 loss that comes from Medicaid.  An average SNF has fifty percent of its resident days paid for by Medicaid.  In a 100 bed facility in Wisconsin (assuming 100% occupancy), the facility loses daily, $2,750.  For a month, the loss total expands to $82,500 and for a year, just below one million dollars ($990K). Neighboring states such as Iowa (loss of $12 per day) and Illinois (loss of $25 per day) have better reimbursement ratios per daily cost but present other challenges. For example, Illinois has such overall budgetary problems that annually,  facilities must accept IOUs in lieu of payment as the State runs short of funds.  Kansas and Missouri had rate cuts this past year.  Only two states in the nation in 2016 has surplus rates under Medicaid – North Dakota and Virginia (Virginia is basically break-even).

Adding to this picture are the market and economic forces that provide additional headwinds for many (SNFs).

  • Medicare Advantage: 2018 will mark the year where 50% of all Medicare days for SNFs are paid by non-fee for service sources/plans; the dominant being Medicare Advantage.  In some metro regions, Medicare Advantage days already eclipse the 50% mark (Chicago for example).  Because there remains a surplus of SNFs beds in most if not nearly all markets, the Medicare Advantage plans have been able to set price points/ reimbursement rates below the Fee for Service rate; in most case, minus 10% to 15% lower.  Similarly, these plans focus on utilization and length of stay so rates are not only lower but stays, universally shorter.
  • Bundled Payments and ACOs: While CMS axed the core of the evolving mandatory bundled payments (hip, knee and cardiac), various  voluntary programs/projects are active, fertile and expanding in many markets.  The same is true, though less so, with ACOs.  As with Medicare Advantage but on a more focused basis, these initiatives seek to shorten length of stays, pay less for inpatient care, and focus on quality providers versus generic market locations.  In other words, the incentives for upstream providers (hospitals) under bundled payments  and ACOs is to cherry-pick the post-acute world for high quality, highly rated providers and to work to make the overall post-acute utilization as efficient and non-inpatient related as possible.
  • Care and Point of Service Advances: As technology and innovation in health care and direct surgical and medical care expand, the need for certain types of care services shifts.  Inpatient, post-acute care is seeing its share of “location of care” impact.  Patients once commonly referred to Inpatient Rehabilitation Facilities now hit the SNF.  Patients that may have gone to the SNF post a knee replacement or even a hip replacement, now go home with home health.  With the very real possibility of an equalized post-acute payment forthcoming, the post-acute transformation from a focus on “setting of care determinants” will all but erode.  What this means is that occupancy dynamics will continue to change and building environments that can’t be shifted to a new occupancy demand and patient type, will be obsolete.

Given the above forces, policy dynamics, etc., the overall outlook skews a bit negative for the SNF sector in general.  And while I may be a bit “bearish”, there are some unique opportunities present for properly positioned, properly capitalized providers.  Unfortunately for most investors, these providers and provider organizations are generally private, regional, perhaps non-profit and in nearly all (if not all) cases, not part of a REIT.  Some general facts that bear understanding and reinforcing.

  • By nearly all quantitative measures and expert reviews, the industry is over-bedded (too much capacity) by minimally 25% up to 33%.  This is not to say that any one facility in any one location typifies the stigma but as a whole, a solid 25% of the bed capacity could evaporate and patients would still have ample beds to access.  Remember, the average industry occupancy has shrunk to 80% of beds available.
  • Average revenue due to reimbursement changes and the impact of Medicare Advantage and “stuck to declining” Medicaid rates, has shrunk on a per day basis and a Year over Year basis; down from $259 per day in January 2015 to $244 per day in July 2016 (negative 2%).

  • The average age of physical plant across the sector is greater than 25 years (depreciated life).  The average gross age since put into use is older than 30 years.  This means that the typical SNF is larger in scope, very institutional, and expensive to retrofit or modernize.  In many cases, modernization to private rooms, smaller footprints, more common space, etc. comes at a cost greater than any potential Return on Investment scenario.  The winning facility profile today is under 100 beds, all private rooms, moderately to highly amenitized and flexible in design scope and use (smaller allocations of corridor or single use spaces).
  • Quality ratings and performance matters today.  SNFs that rate 3 stars or lower on the Medicare Star system will have trouble garnering referrals, especially for patients with quality payment sources.  It is not easy to raise star levels if the drag is caused by poor survey performance.  In a recent review I did for a project, analyzing the Consulate holdings of a REIT (SNF assets leased by the REIT to Consulate for management and operations), the average Star rating of the SNFs was below 3 stars and the 80th percentile, just above 2 stars).

The general conclusion?  Watch for another rocky year for the SNF sector and particularly, the large public chains and the REITs that hold their assets.  The sector has significant pressures across the board and those pressures are not decreasing or abating.  Still, there will be winners and I look for strong regional players, private localized operators and certain non-profits (health system affiliated and not) to continue to do well and see their fortunes rise.  A change in Medicare payment to RCS-1 will benefit this group but at the expense of the other SNFs in the industry that have not focused on quality, have a disproportionately high Medicaid census and have used Medicare fee for service/therapy/RUG dynamics to create a margin.

January 18, 2018 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment