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Senior and Post-Acute Healthcare News and Topics

SNFs and Stranded Assets

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

Seniors Housing/CCRC Outlook plus Lessons from Brookdale

Now that the real estate dynamics have shifted on-balance to par or better (majority of markets can liquidate inventory at stable or rising prices with constant or modestly increasing demand), the outlook for Seniors Housing (IL, AL and CCRC) is less murky. The recessionary of the last 7 to 8 years has lifted.  What is visible, while still fairly complex market to market, is a picture that is illustrative for the next ten or so years – ample to adequate supply and average to slightly soft overall demand.  Perhaps, this is the Brookdale lesson?

Amplifying the above; what we know statistically is that demand has globally peaked and now, flattened.  Recall that Seniors Housing is very much local and regionally biased/impacted so some markets may be hotter in terms of demand than others.  By example, in 2010 (full recession impact), occupancy in the sector was 86.7%.  By the end of 2014 and since, occupancy has recovered but only to an average of 90% (per the National Investment Center).  During this same later period, new unit production has increased to an average of 3,200 per quarter (trailing seven quarters since end of 2016).  This is a 50% increase over the prior eight quarters.  The cause? Less about occupancy reality, more about a growing optimistic economic outlook, improving real estate dynamics (the leading cause) and more accessible capital, particularly as nontraditional sources have entered the sector with vigor (private equity).  A quick translation is for an increase of approximately 5,000 additional units in the top 31 MSAs (could be as much as 6,000 depending on where the units are in the development cycle).  This additional inventory is entering a market that is showing signs of over-supply (again, is there a Brookdale lesson here?).

occupancy-web

In multiple articles, I have written about phantom or perhaps more accurate, misunderstood economic and demographic trends.  Seniors housing global demand is very elastic, particularly for IL and CCRC projects that are at or above market (where the bulk of the industry is).  Demand elasticity exists where and when, price directly impacts the number of and the willingness of, consumers to consume a particular good or service. As price rises, the number decreases.  As price falls, the number increases.  For seniors housing, the elasticity wanes and trends toward inelastic demand when the price mirrors “rent controlled or modest income” housing.  In this case, demand is constant and actually inverse proportionately (more demand than supply). Better real estate economic conditions and improved investment market conditions (stock market, investment returns, etc.) influence to a lesser extent, the demand outlook as stronger or stable wealth profiles for consumers reduces the anxiety of purchase, especially where entrance fee models are concerned.

From a demographic perspective, the issue at bear is the actual or real number of seniors in the target age range with an economic wherewithal to consume (have the financial capacity).  Only (approximately) ten percent of all seniors 75 and above reside in seniors housing specifically (IL or CCRC) and a slightly larger (aggregate)number now reside in quasi-seniors housing projects (age limited housing developments ala Del Webb).  Between 2010 and 2016, the 75 plus population grew at an anemic rate of 1.8%.  The expected rate of growth for this cohort over the next five years increases to 3.8%.  More telling, for this same period, the subset of 75-79 grows at a rate of 5.7%.  These numbers present a bit of optimism but in real terms, the demand change (within the demographic) doesn’t create sufficient opportunities for absorption of the inventory growth, if the same remains at its present pace.  The demographic fortune doesn’t really begin to change dramatically until 2021 and beyond.  At 2021, the group turning 75 represent the start of the baby boomers (2021 -75 = 1946).  Prior to this point, the demographics of seniors 75 and above still reflect the World War II trend of birth suppression.

To Brookdale. The operative lesson is that Brookdale has far too much supply for the real organic demand that exists for plus market rate, congregate seniors housing. In my outlook comments below, readers will note how the demand around seniors housing and the congregate model is actually shifting slightly which has negatively impacted Brookdale. The acquisition of Emeritus has since offered proof of some age-old adages regarding Seniors Housing: local, not conforming to retail outlet strategies, very elastic demand, tough to price inflate for earnings and margin, asset intense and thus capital re-investment sensitive, and of course, full of me-too projects that are difficult to brand differentiate.  In the Emeritus acquisition, economies of scale and cultural assimilation proved difficult but frankly, such is always the case. The real crux is that the retail outlets (the Emeritus properties) were not accretive -seniors housing doesn’t quite work that way.  While the asset value of Brookdale skyrocketed, the earnings on those assets retrenched.  With soft demand and a lot of congregate projects highly similar and no room at the ceiling for price elevation, a fate accompli occurred.  The lesson?  Certain types of Seniors Housing is about played out (vanilla, above market projects) and a heavy concentration of this in a portfolio will evidence occupancy challenges and rental income return challenges (no price inflation).  Demand is also soft for reasons mentioned above, primarily demographic but also still, economic in some instances.  Similarly, as I mentioned above, seniors housing is very local.  A retail brand strategy simply (the Wal-Mart concept) won’t work.  Residents identify brand to local or at best regional – national means nothing.  If the market isn’t supportive regardless of who or what it is, the project will be challenged.  Emeritus brought too many of these projects into the Brookdale portfolio.

Below are my key outlook points for 2017 and the next five or so years for IL and CCRCs (non-affordable housing).

  • Demand across most property types will remain soft to stagnant.  This means 90% occupied is a good target or number.  Of course, rent controlled projects will continue to experience high demand, particularly if the projects are well located and well-managed.  Regional and local demand can and will vary significantly.  The projects that will experience the softest demand are above market, congregate, non-full continuum (non-CCRC).  Projects with the best demand profile contain mix-use, mix-style accommodations with free-standing and villa style properties.  While highly amenitized projects will attract traffic, demand isn’t necessarily better due to price elasticity in the segment.
  • Improving economic conditions/outlook will undergird and help bolster demand, though the demographics still trump (no pun intended). Some notes to consider.
    • The real estate economy can benefit, even with a slightly higher interest rate trend, if employment and wages continue to strengthen and de-regulation of some current lending constraints occur.  I think the latter two points offset any interest rate increases in the near to moderate term.
    • Rising interest rate fortunes help seniors more than stock market returns, though this trend is changing as seniors have been forced to equities to bolster return.  Still, most seniors are highly exposed to fixed income investments and a somewhat improving interest rate market will improve income outlooks.  Better or improved income does psychologically impact the consumption equation, “positively”.
    • Capital access will remain favorable/positive and banking de-regulation to a certain extent, may push banks back to the sector (they have been shy to seniors housing for the last 5 to 8 years).
    • Even with improved economic conditions, the mismatch between demand and supply (discussed earlier) will restrain rent increases in the near term.  This could present some modest operating challenges for the sector as price inflation on wages, etc. will occur before any opportunity to raise fees/rent.  The net effect is a modest erosion in margin.  I don’t see much opportunity to fight this effect with increased occupancy.
  • Increasing occupancy or in some cases, staying at current occupancy levels will continue to require incentives.  Incentives negatively impact revenue in the short-run.
  • The average age for residency on admission and across the product profile will continue to move up as a general rule.  In addition, the resident profile will continue to slide toward additional infirmity and debility.  Providers will continue to work to find ways to keep projects occupied by offering aging-in-place services.  While this is a good strategy to a certain extent, the same does harm or impact negatively, the ability to market and sales-convert, units to a more independent resident profile.  I liken this to a “rob Peter to pay Paul” approach.  It works but not without side-effects and perhaps, unintended consequences that can be very deleterious “down-the-road”.
  • The additional inventory that is coming into the sector won’t slow down for another two or so years.  This is in-spite of a weak to stagnant demand.  Some investors and developers are willing to be somewhat ahead of the baby-boomer curve even though I believe this is unwise (see next point).
  • The reason I believe the baby-boomer impact for the sector will be modest and actually, disheartening is that the demographic shift doesn’t equate to product demand directly.  Boomers have an increasingly different view of the world and a different set of housing and lifestyle expectations plus economic capacity.
    • The first group of Boomers was hurt the hardest by the most recent recession.  They lost a great deal of wealth and income profile as many were the first displaced as jobs eroded (oldest employees, highest paid). They also have less employment time to recoup any income/savings losses.
    • Generationally, their savings rate is significantly less than their parents.  These folks, while still more modest in comparison to Boomers born five to ten years later, didn’t delay gratification or extravagance the way their recession-influenced parents did.  Less overall wealth negatively impacts their ability to afford higher-end seniors housing.
    • Congregate living (apartments) is less their style.  They are the first age group (Boomers) used to a more expansive living arrangement.  While they’ll move eventually, they will not see 1,200 sq. feet at $4,000 a month as attractive (not even at $3,000). They will have unfortunately, mismatched expectations in terms of “size” versus cost.  They’ll want larger but for less rent than realistic.
    • They are generally healthier with a different view of age related to retirement and retirement residency.  Don’t look for 75 year older Boomers to be horribly interested in a CCRC or Seniors Housing development, particularly if their health is good.  They’ll wait until 80 or older to trigger a move.
    • Boomers are more mobile and more detached than their parents.  This means in-market moves and the traditional radius markets/math will be less applicable year-over-year with Boomers.  They will be willing to shop broader and do so more for value and price – more for less or at least, a perception of the same.  They are nowhere near as homogeneous by social construct as their parents.
  • Greater pricing flexibility will continue to evolve.  This means different entry-fee options, monthly service options with/without amenities, more ala carte, etc.  Service infrastructure for certain communities may suffer as residents will continue to want more choice but less bundle (won’t pay inflated fees for what they perceive as things they don’t use or want).
  • Because the sector is highly influenced and trended local, some markets will continue to thrive while others will continue to struggle, regardless of national trends.

 

March 3, 2017 Posted by | Senior Housing | , , , , , , , , | Leave a comment

Getting CCRC Feasibility Studies Correct … and Other Studies as Well

In my consulting career, I’ve done a fair amount of feasibility work (market, economic, etc.).  Similarly, I’ve done a fair amount of similar analyses, primarily related to M&A activity and/or where financing is involved (debt covenant reviews, etc.). Heck, I’ve even done some bankruptcy related work!  I’m also queried fairly often about feasibility, demand, market studies, etc. such that I’m surprised (often enough) that a gap still exists between “proper” analysis and simplified “demographic” analysis.  Suffice to say, feasibility work is not a “one size” fits all relationship.

I’ve titled this post “CCRC feasibility” principally because the unique nature of a true CCRC project provides a framework to discuss a multitude of related industry segments simultaneously (e.g., seniors housing, health care, assisted living, etc.).  Starting with the CCRC concept, a set of basic assumptions about the feasibility process is required.

  • Demographics aren’t the arbiter of success or failure – feasibility or lack thereof.
  • Demand isn’t solely correlated to like unit occupancy, demographics (now or projected), or for that matter, how many units are projected to be built (following the Jones’ as a qualifier).
  • Capital accessibility isn’t relevant nor should it be.
  • National trends for the most part, are immaterial.  Local, regional and state are, however.
  • Projects pre-supposed are projects with inherent risk attached.  This isn’t an “if you build it, they will come” type exercise.  The results shouldn’t be thought of as a justification for a “specific” project already planned.

The last point typically generates  a “heresy” cry from folks and certain industry segments. Regardless, I am adamant here in so much that true feasibility analyses determines “what makes sense” rather or as opposed to, justifying that which is planned (or the implication that the client is paying for a study to justify his/her project).  Remember, I am a fan of the fabled quote from Mark Twain attributed to Benjamin Disraeli (the former Prime Minister of Great Britain): “There are three types of lies….lies, damn lies and statistics”.  As an economist, I have deep appreciation for this as all too often, I see analyses that smack of this latter type of lie.

(Note: The source of the actual “lies, damn lies” quote is still a mystery…thought initially to be said by Lord Courtney in 1895 but since, proven invalid.)

Carrying this feasibility discussion just a bit further, the approach that I recommend (and use) incorporates the following key assumptions about seniors housing (CCRCs) and to a lesser extent, specialized care facilities (Assisted Living, SNFs, etc.).

  • The demand for seniors housing, true housing, is very price elastic.  Given the elasticity, all demand work must be sensitized by price. The more specialized or unique the project might or may be, the more sensitive the demand elasticity becomes (greater or lesser).
  • Local economic conditions matter – tremendously.  This is particularly true for CCRCs and higher-end seniors housing projects, especially real estate conditions.
  • Regional and state trends matter particularly the migration patterns, policy issues, job issues, etc.  Doubt me?  Let’s have a discussion about the great State of Illinois (for disclosure, I have a home and office in Illinois).
  • Location(s) matter.  I incorporate location/central place theory elements in all of my feasibility work and analyses.
  • Demographics are important but not in the normative sense.  Yes, age and income qualified numbers are important but education and real estate ownership, location and years residency in the market area(s) can be as impactful.
  • Competition is important but in all forms.  Given the demand elasticity of seniors housing, the higher the price, the greater the wealth status required of the potential consumer, the greater the options available to that same consumer.
  • Ratios matter.  The demographics are important but the ratio within the demographic correlated to the project, within various locations, etc. is “money”.  (Sales folks love this stuff).  How many seniors does it take to fill a CCRC?

Because no one project is equal to another, feasibility work and like analysis is both (an) art and a science.  I liken the process to cooking.  Recipes are key but taste and flair and creativity are important as well.  Honestly, knowing the industry well from an overall perspective is ideal – like being a chef trained by the masters!  When I see flawed analysis, it typically comes from a source that follows a recipe; a recipe for market analysis, etc.  Knowing the industry, having operated organizations or facilities, being trained in quantitative analysis, etc. separates good or great from average.  Remember Twain/Disraeli.

So to the title of this post; the correct or proper methodology for feasibility studies and similar analysis (sans some detail for brevity and not in any particular order)….

New Facility/New Location

  • Location Analysis – in economic parlance, the application of elements of Central Place Theory.  This includes a review of the site in relationship to key ranked variables such as market/demographics, accessibility, staff/employment access, proximity to other healthcare, other services, etc.
  • Pricing – what is/are the core pricing assumption(s)….I’ve written on strategic pricing models on this site.  If I am doing the pricing work, I apply the concepts in the Strategic Pricing presentations and worksheets found on the Reports and Other Documents page on this site.
  • Demographics – I’ll use my pricing data and my location analysis to frame my demographic analysis.  Aside from age and income, I’ll look at migration patterns, education, career history, etc. plus I’ll review the information on a geocoded basis to refine market relationships between customers and other competitors.
  • Demand Analysis – From the demographic data and tested against the pricing, I’ll build a demand analysis and a penetration analysis that provides a range of likely target customers, within the market areas, give the pricing information, for a particular product.  Historic migration and market area occupancy of like accommodations is used to sensitize the demand analysis.
  • Economic Analysis – This is a review of current market conditions and trends that can impact the project’s feasibility, positively or negatively.  Real estate, income, employment, business investment, economic outlooks, policy implications such as tax policy, etc. are all key elements reviewed.
  • Competitive Analysis – What is going on within the area/regional competition of like or quasi-comparable projects is important as a buffer or moreover, a stability (or lack thereof) check.  I like to look at all potential or as many as practical, comparable living accommodations – not just seniors housing (condos, apartments, etc.).

Expansion Projects

I will complete a major portion of the above with less time spent on location analysis and pricing work (though pricing is still key for accurate demand).  I have watched organizations cannibalize their own market share and occupancy levels with expansion projects so accurate gauging of current and pent-up demand is critical along with conditional trends (economic, competitive analysis, etc.).

M&A, Financing, Etc. Projects

Again, all of the above work is relevant but depending on the circumstances, I will incorporate benchmark data from industry sub-sets.  For example, for SNFs I look at compliance information, CMS star ratings, staffing numbers, payer mix/quality mix and of course, federal and state reimbursement and policy trends.  When I review covenant defaults and provide reports, I narrow the analysis based on the core nature of the default but most often, the issues of late are occupancy, pricing, and revenue models versus fixed and variable cost levels.  Pricing work is often key along with a review of marketing strategies.

Is there more to this topic area?  Of course and this post isn’t meant to be exhaustive nor a text-book supplement.  It is however, a ready framework that can provide guidance to those looking at conducting or contracting for, a feasibility, financing or market analysis.  My advice: Getting it done right the first time saves money, prevents future problems, and assists with positive outcomes for any project or purpose.

February 23, 2016 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , , , | Leave a comment

The Demographic Realities of Seniors Housing and Healthcare

As regular readers know, I speak at a number of conferences annually.  Additionally, I work with financiers and investors in the space literally daily.  In all my journeys and conversations, I am still faced with some major myth “debunking” about the nature of the seniors housing and healthcare demand, current.  The major myth: Baby-boomers are either here, impactful, or here soon enough that additional supply and different supply is necessary. Nothing is further from reality.

The economist in me (and the economist that I am) wants desperately to provide a full-blown lecture here but I’ll refrain and provide a Cliff’s Note version.  Demand is a function of supply and to a lesser extent, vice-versa.  The two are interdependent.  Demand (commercial) requires a supply of consumers, able and willing to pay a price for a given product.  Seniors housing and healthcare, especially housing, has a very elastic demand curve.  This means that price is a major influencer in demand. The amount of demand for higher-end, above market seniors housing, is less than the amount of demand for moderate and lower-priced seniors housing (at its core).

Demand is also influenced psychologically hence the “willing” component. Seniors housing requires the consumer to make a psychological decision about moving or consuming, a niche’ product.  This fact is supported by the demographic reality that less than 12% of all seniors live in a specific “seniors housing” environment.  While a greater number reside within a NORC setting (naturally occurring retirement community) such as a condo complex or apartment complex, the reality is that fully 80% of all seniors at anytime, do not reside in seniors housing nor are they “looking”.  The core dilemma with seniors housing is that seniors universally, prefer to live in their “residence” in their community.  Some, but a rather small number, choose or are motivated to move annually by choice or by need – the latter being the greater motivator (death, family move, health issue, change in neighborhood, etc.).

Consumers, in this case seniors, exist along the full spectrum of age and ability (economic) to pay.  Given the elasticity of demand for seniors housing (the higher the price, the fewer number of able consumers) coupled with a plethora of living options for seniors (home, condo, apartment, etc.), measuring the actual demand for seniors housing is a bit more complicated than most want to believe.  The complexity lies demographically and economically.

First, the demographics today are not spectacular.  While it is true that we have more older adults reaching ages 80 plus than at any time in history, the number of people in this cohort as derived by birth is falling.  An individual today aged 80 was born in 1935 – the depression/war years.  During this period (depression/war years), birth rates declined precipitously.  See chart below.

Birth

It isn’t until the post 1945 years and subsequently, into the mid 1950s that birth rates accelerated into what we commonly know as the Baby Boom.  Simple math thus tells us that the real expanse of supply of seniors, age appropriate for seniors housing (around age 80) won’t occur for another 15 years minimally.  Today, we are actually seeing a reduction in overall “age relevant” supplies of seniors for seniors housing.

Back to the point about seniors housing demand being highly elastic.  Fewer consumers (potentially) also means that all consumers by economic status and desire are fewer in number.  The point here is that the supply of seniors for higher-end housing is not just smaller in number  but smaller in “desire” or motivation.  Folks that have the means to spend thousands per month and invest an entry fee of $250,000 to $1,000,000 also have the means to explore multiple different options.  In other words, the range of substitute products (alternatives) for this group is plenty and growing.  They clearly can afford to remain at home longer, acquire supportive services, or migrate to lifestyle communities or other planned communities that include multiple options and services geared towards “aging in place” (see Del Webb and The Villages as examples).

Today, there is a reason many communities and projects continue to struggle with occupancy.  The average nationally remains stuck around 90% and Assisted Living hasn’t broached this level yet – even though projects continue to come forward at a steady clip.  A contributing factor?  The demographics are not as fluid and as strong now as industry folks want to portray.  The industry is in the core openings of the 20th century baby bust.  Additionally, not only is this next group demographically smaller, it is economically less well off, by virtue of time of birth, than the cohort preceding and the one following.  This is in effect, the double demographic dilemma for seniors housing.

The moral of this present story: Supply of units for the most part, in most regions, is good to surplus.  Reinvention in place is what I advise and for growth; acquire – don’t develop.  Adding additional inventory is not only expensive it is difficult to support, except in certain markets where certain really good conditions apply, demographically and economically with proper demand analysis.  This present condition will last for about the next 10 years and to a certain degree, maybe longer as the age at which seniors seek “seniors housing” elongates – moving into the 80s. Developers need to understand this condition and seek proper demand analysis and economic planning before believing the demographics of “If you Build it, They Will Come!”

November 19, 2014 Posted by | Senior Housing | , , , , , , , , | Leave a comment

CCRC Update 2014

Earlier this spring (a couple, three moths ago), I spoke at a marketing/P.R. conference and when my session was over, I sat and visited with a number of the attendees.  My presentation was about value propositions and marketing; how to align your organization’s core economic value components within a marketplace, within a customer segment.  Within the short additional time I spent with these attendees, I learned that a number of their organizations (CCRCs) were still struggling post the recent economic recession/slow-down.  In fact, a number of them expressed that in their areas/region, recovery hadn’t yet begun.

Since that event and over the course of the past three months or so, I took notes on various client engagements, discussions and research reports on how the CCRC industry is fairing these days.  Before I break down my conclusions/observations, some general prefacing comments about the industry are required.  First, the CCRC industry is truly different by location and thus, it is expected that some areas/regions, etc. are faring better than others. Second, established projects have fared differently than newer projects; not always better but different.  Third, the capital structure of a CCRC (how much debt and how the debt is structured in terms of rate, etc.) is a major component of how well or not well, certain projects are doing.

Below are my observations/conclusions of how the CCRC industry is doing mid-way through the third quarter of 2014.  As stated, most of my observations are first-hand (client engagements)* followed by research and conversations with those that work in and around the industry. *(My firm and in many cases me specifically, does capital development/corporate development work within the industry including consultant’s reports when covenant defaults occur, strategic planning, turn-around consultation, M&A work, research for banks and investment banks, and economic, market, and financial feasibility studies.  My comments do not reflect any specific client or series of clients or any engagement former or current).

  • Late 2013/early 2014, Fitch issued their outlook on the CCRC industry as “stable”.  Their conclusion was that improving occupancy rates, stable expenses due to the non-inflationary economy and access to low (historically) cost capital was favorable and thus, their rating.  In general, I concur that where real estate rebounded (used inventory down, prices stable and climbing) and general economic conditions improved (unemployment falling, commercial activity rising, etc.), demand for units returned to near pre-recession levels and occupancy increased.  However, as I mentioned at the beginning of this post, there remains pockets of weakness, some fairly profound, across the country.  The regional/local outlook as opposed to the 20,000 foot national trend is more relevant to the success/struggle of any one project.  For example, our clients in “rust belt, heavy manufacturing” areas in Ohio, Wisconsin, Illinois, West Virginia and New York would mount a stiff argument that the outlook is far from “stable”.
  • Pricing has remained relatively flat and in many areas, occupancy gains have occurred as a result of discounting and promotions.  I don’t see this changing any time soon as while demand is good in some areas, demand is tempered by recent events and still, a large amount of economic uncertainty.  The wealth profile of the current demographic has shifted, especially on the income component.
  • Approximately half of the projects that were in the development queue in 2008 evaporated or re-scaled.  Only recently has the industry returned to a somewhat robust, new development outlook.  Access to continued low-cost capital is a key element of fuel for this emerging (again) trend and even though rates ticked-up in November/December 2013, they have since stabilized.  Rate however, is just one component.  Demand for debt on the part of investors is still at low ebb.  Suppressed yields have moved investors out of fixed rate, tax exempt debt en-masse.  Deals still are competitive but nowhere close to pre-recession levels.  Banks are only now starting to revisit commercial lending to the sector and again, not with the same fervor as pre-2008. The overall number of outlets has declined and the debt to equity levels are still conservative (70/30).  Valuations remain a bit low as comps are still weighted by one-off deals, distress deals and work-outs and bankruptcies.  Book remains the valuation arbiter and as such, cap levels remain in a narrow range.  Overall, the capital outlook is fair but caution and uncertainty remain prevalent and thus, valuations are flat and good deals get done but marginal deals still struggle.
  • Rising occupancy and improving economic conditions have slowed defaults and tempered bankruptcies but not eliminated them.  Again, certain projects in improving economies have rebounded though others in regions/markets of slow to no-recovery languish.  Though average occupancy has once again moved into the low ninetieth percentile across the industry, I still see projects below this level on a regular basis and some, profoundly below.  In virtually all instances when I encounter low occupancy, two elements are present.  First, the market area is struggling economically – real estate, jobs, infrastructure, etc.  Second, the project itself is really viable or relevant.  More on this latter point toward the end.
  • Projects that have done well, rebounded, stayed vibrant exhibit the following key elements, aside from being in a market area that isn’t still declining or not recovering.   First, they were not overly leveraged.  Second, they had/have investments and cash reserves.  Third, they didn’t defer maintenance to any great extent.  Fourth, they stayed relatively lean on the expense side. Fifth, they have diversified revenue streams/bases.  Sixth, their pricing was market balanced and actuarially sound.  Finally, their management was forward-thinking and had plans in place to address the changing environment.  They have a good senses of the economic and market conditions impacting their organization and they plan and address these conditions fluidly.
  • Projects that haven’t fared well exhibit the opposite characteristics from above and/or, they simply exist in market areas that haven’t rebounded.  The most common element of struggling projects that I see is ineffective senior management and governance.  They simply never moved beyond a paradigm that was shifting, shifted and won’t ever return.  They aren’t relevant  and  haven’t learned or developed the current competencies required to compete in a different economic and market environment.  For many, the writing is on the wall and for some, revival is possible but a complete turn-around is required.

What I have concluded over the last few months is that industry success is a function today of five components;

  1. Being in a market area that is economically stable and modestly improving.  Real estate fluidity and price stability is important but equally  important is the general economic outlook, government infrastructure and commercial economy.  Projects that aren’t in this type of environment won’t, no matter what they do, improve beyond a point of mere survival (thriving just isn’t possible).
  2. Marketing and pricing today require a completely different set of competencies and strategies to achieve success.  Pricing must be strategic and financially validated and demonstrative of a clear value proposition.  No longer can a project succeed on guessing, market comparables and eyeballing what “management thinks” the budget will support. Marketing is different as well.  This is no longer a real estate driven sale and the economic axiom of elastic demand applies.  CCRCs have a very elastic demand curve and such, pricing and marketing must unite in the creation and communication of the economic value proposition.  More leads than ever are required to generate sales and build and hold, market share.  Traditional print and media ads won’t get it done.
  3. A highly diverse revenue stream/platform (multiple service lines) such that liquidity and debt service covenants can comfortably be made within normative occupancy levels (90th percentile or lower is best). If this is the case, the CCRC also tends to be more market competitive and capable of self-referral and internal market development.  In other words, it has multiple channels for referral development.
  4. Strong, capable management/leadership that isn’t necessarily, tied to the industry conventional wisdom.  They are adept at planning, forecasting, and keeping operations structured on high-quality, efficient service delivery.  They know the market, know their place in it, know the economic outlooks and demand elements and adjust their products accordingly.
  5. A relevant physical plant environment for the market.  A project doesn’t have to be new and/or the most glitzy.  It does have to fit the market however and be current – minimal to no deferred maintenance.  Economic value proposition are about proper product value, inclusive of warranty, for the customer to evaluate the tangible and intangible relevance.  The physical real estate elements are a major component of the proposition and properly positioned within the overall project, priced and communicated correctly, the prospects for sales and success are high.

August 15, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

House Passes Doc-Fix Bill Destined for Nowhere

Earlier today, the House passed a bill that repeals the SGR formula used to derive physician reimbursement under Medicare.  For more specifics on the SGR, see a previous post I wrote at http://wp.me/ptUlY-ae .  The legislation is title SGR Repeal and Medicare Payment Modernization Act.

Unfortunately, the fate of the legislation is predestined as the bill includes an amendment from the Ways and Means Chairman (Rep. Dave Camp) that delays implementation of the tax/fee penalties concurrent with the Individual Mandate. It does not repeal or delay the mandate, simply the punitive measures for those that don’t comply.  Recall, the Affordable Care Acts requires all individuals above a certain income limit (tax filing limit) or without expressed hardship, to obtain health insurance by April of this year or face a penalty.  The penalty embedded within the act is a flat dollar floor with amounts increasing based on gross income.  With certainty, the inclusion of the amendment in the legislation spells a death sentence in the Senate where Senate Democrats hold a majority and Leader Reid, controls the flow of legislation for vote.  The bill will never see a vote in the Senate due to the Camp amendment.

The sticking point on repeal of the SGR is cost.  The Congressional Budget Office estimates that a repeal of the SGR, shifting to an indexed option with market baskets and productivity adjustments, will cost $138 billion over 10 years.  The dollars would need to come from an already shaky Medicare program that today, doesn’t really have another source of revenue save tax increases or contra-revenue infusions via reduced provider payments elsewhere in the industry.  The funding dilemma that occurs with the Camp amendment is that such an amendment actually saves the government $169 billion.  The savings is achieved by a projection of fewer people, sans the mandate penalty, having health insurance including under Medicaid and SCHIP (or CHIP).  With fewer people accessing the government-funded entitlement programs, the outflow is less, savings in amounts greater than the SGR repeal costs.

Once again, a fascinating insight into current federal health policy and the economics at play…

March 14, 2014 Posted by | Policy and Politics - Federal | , , , , , , , , | Leave a comment

CCRC/Seniors Housing Outlook 2014

Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so.  After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize.  Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading.  Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%.  For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%).  Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.

The question for 2014 is will a growth trend emerge?  My answer is “no” but the tide will remain somewhat positive.  What needs expansion is the following;

  • CCRCs and Seniors Housing is very local and regional.  Effectively, market dynamics at the local and regional level will play more directly than national trends.  As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
  • The real estate market, while better, remains vulnerable nationally and moreover, regionally.  Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels.  Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples).  For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
  • The overall economy is still mired close to neutral.  Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge.  The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages.  The gains are part-time, lower wage, service sector and seasonal/temporary work.  The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high.  Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows.  Essentially, this means price inflation remains checked, even for seniors housing.  With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
  • Available product in many markets is still fairly high.  While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost.  Recall that in April of 2013, unrated and rated tax exempt debt  was at record lows and volume in terms of issuance on the uptick.  Essentially, demand was equal to and often greater, than supply.  Nine months later, the cost in terms of interest is 25 to 50% higher across all rated  and unrated categories  with new project/new campus debt cost today hovering around 8.5%.  Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope.  Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.

Given the above, my outlook is good but not great.  I see continued occupancy improvements but incrementally.  I also see continued regional struggles as some locations are just not in recovery mode.  I see enough volatility economically to keep things moving cautiously forward.  Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief.  Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale.  I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation.  Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.

Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market.  For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability.  This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve.  This gap however, will narrow if and when, the industry fully rebounds.  A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.

Where vulnerability for organizations remains is at the capital structure level.  I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants).  Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014.  We saw some salvation with low rate refinancings but that window has closed for the majority.  The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges.  What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.

A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market.  For lack of a better term (or terms), I call this the Baby Boom Fallacy.  Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers.  In reality, nothing is further from the truth today, and for the next number of years.  The true baby boom period is 1947 to 1963.  This means that the oldest Boomers are just above 65 (67 to 68).  Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away.  Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.

The current resident demographic demand is the baby bust generation or war babies.  The World War II era babies are part of time where birth rates declined due to depression recovery and the war.  The target range lies within the group born between 1930 and 1943 – pre Baby Boom.  This period in time is more bust than boom in terms of numbers.  The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate.  There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more.  Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers.  The Boomers, contrary to rhetoric, aren’t here yet as the consumer.

January 28, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

Decline in Hospice Demand?

In the last month and across a series of analyst calls (investment firms) that I field on a regular basis, a question repeats: Why is the demand for hospice declining? Of course the economist in me wants to opine in great detail about “demand” and what factors increase or decrease demand or, shift demand among substitution products, etc.  For brevity, the demand lecture isn’t warranted and in actuality, the current hospice dynamics are less about an increase or decrease in demand, more about realizing where core “hospice” demand lies.

Point of fact: The demand for hospice services at the core hasn’t changed at all and in some markets, demand as expressed by referral volume is up.  The trend that is evident however is that the demand as expressed in overall lengths of service has changed.  This is the impact that most providers are seeing/feeling.  While for some, year over year volumes are flat to down for others, volumes in terms of referrals and encounters are rising but core census is flat.  The flat census expressed by the number of covered individuals on service at any one point, has flattened even with referral volumes increasing simply because stays are shorter.

What is happening in the industry is a bit like realignment of incentives and forces that as they congeal, are morphing demand as experienced by providers. Integrating these pieces paints a picture of now and near future demand  in the industry.

  • The Vitas Impact: Anytime the largest player in the industry is targeted by fraud and federal investigative activity, the spill-over to all providers of similar size (and the rest of the industry) shifts the market.  This impact can’t be directly quantified but it is of a large magnitude.  The behavioral aspects of the DOJ suit are a reminder to all providers to tread lightly in certain operational areas – namely marketing, certification and re-certification.  One need look no further than the home health industry and the Amedisys targeting to see how the entirety of an industry is ultimately impacted once the microscope is fixed on the largest provider.
  • Large vs. Small Providers: The substantial industry growth between 200o and 2011 (60%) occurred almost entirely in the proprietary (for-profit) sector and among large, multi-state, national scope providers. Across the same period, the non-profit and government providers shrunk in numbers.  The overt scrutiny from Medpac, CMS and the OIG/DOJ is on this segment of the industry.  Large False Claims actions and settlements have occurred in the “big” or “large” side of the industry, creating certain behavioral changes that shift elements of the industry demand profile.  Again, the largest impact all other providers in the space as fundamentally, these large providers account for fully half of the industry patient population at any given point.
  • CMS Changes and Diagnostic Scrutiny: Looking at demand and taking into account the drivers since 2000, one can easily be fooled that the core demand was larger than it is.  The laxity in certification definitions within the Hospice benefit created a wide playing field as providers entered the market.  Is this or was this an unveiling of pent-up demand?  Hardly.  It was an exploration of how demand could be quantified or in many cases created or justified to meet the supply of providers in the market.  Across this same ten-year period, the fastest growing diagnoses in terms of percentage increase and volume were Non-Alzheimer’s dementia, general debility and failure to thrive.  Not surprisingly, these same diagnostic (for lack of a better term) categories also profile the longest stays.  By 2014, CMS will eliminate these categories as suitable for certification and require additional diagnostic coding to substantiate initial and ongoing certification.  A quick review of the utilization data by diagnosis illustrates how such changes are playing out on the demand side (data courtesy of CMS – click on the link to open the media files and tab select the charts from the bottom of the spreadsheet).

Copy of Top_20_Charts_1998-2008

Reviewing the above and the attached data charts paints a clearer picture of the shifting demand components.  If, as CMS and Medpac suggest, that as much as 25% of the certifications in the dementia (non-Alzheimers), general debility and failure to thrive categories don’t have any other diagnostic comorbidities suggestive of imminent death (6 months or less), than a quarter of the “demand” is logically lost.  Because demand in all instances is impacted by behavior, market and individuals (single or collective), changes in behavior as a result of changes in incentives leads to adjustments in demand.  In the case of hospice, this is clearly evident today and will magnify going forward.  As I have stated before, the industry has too many providers chasing too few organically terminal patients.

The reality regarding the demand equation today for hospice is that the demand is still present and likely, growing.  What is changing however is the methodology for accessing the demand is different.  Demand for hospice providers is a function of two elements: patients with an appropriate diagnosis and length of stay.  If, as is the case, certain generalized diagnoses are no longer appropriate,  this doesn’t equate necessarily to a lack of demand.  It does equate to a shift in demand from current (today) to future as the overall condition of the patient deteriorates and demand quantifiable through coding, becomes evident.  As the market re-balances and the demand curve stabilizes along a new level of equilibrium between all providers (of which there will be fewer) and the new number of appropriately terminal patients (by definition), providers will see stability.  It is certain that average lengths of stay will decline as categorically, the drivers will no longer exist.  It is also certain that hospices that thrive will adjust behaviorally.  For example, nursing home enrolments will no longer be the “gold mine” for many providers.  Payment reform will adjust this element in the next year or two.  Additionally, greater regulatory scrutiny regarding place-of-care is a certainty as CMS is paying greater attention to the diagnostic qualifiers and matching SNF MDS submissions to hospice data (heads up).  The end: Volumes are flat and in some cases marginally increasing but the demand is for intense, shorter stays and more volatility in referrals.  This is the new norm and providers are feeling the shift toward this revised equilibrium point.

December 9, 2013 Posted by | Hospice | , , , , , , | 1 Comment