With a new year upon us and (perhaps) the most amount of free-flowing health policy changes happening or about to happen in decades, it seems appropriate to create some simple resolutions for the year ahead. Similar to the personal resolutions most people make (get healthy, lose weight, clean closets, etc.), the following are about “improvements” in the business/operating environments. They are not revolutionary; more evolutionary. Importantly, these are about doing things different as the environment we are in and moving toward is all about different.
First, a quick overview or framework for where health care is and where it is going. A political shift in Washington from one party to another foretells of differences forthcoming. It also tells us that much will not change and what will is likely less radical than most think. Trump and the Republicans can’t create system upheaval as most of what the industry is facing is begat by policy and law well settled. Similarly, no political operatus can change organically or structurally, the economic realities present – namely an aging society, a burgeoning public health care/entitlement bill, and a system today, built on a fee-for-service paradigm. Movement toward a different direction, an insight of a paradigmatic shift, is barely visible and growing, while slow, more tangible. In short: where we left 2016 begins the path through 2017 and beyond.
The road ahead has certain new “realities” and potholes abundant of former realities decaying. The new realities are about quality, economic efficiency and patient satisfaction/patient focus. The former realities are about fee-for-service, Medicare maximization, and more is better or warranted. The signs of peril and beware for the former is evident via today’s RAC activity and False Claim Act violations pursuit. Ala Scrooge, this is the Ghost of Christmas Future – scary and a harbinger to change one’s behavior or face the certainty of the landscape portrayed by the Specter.
So, resolution time. Time to think ahead, heed the warnings, realize the future portrayal and make plans for a different 2017.
Resolution 1: The future is about measurable, discernible quality. No post-acute provider, home health or SNF, can survive (much) longer without having 4 or higher Star ratings and a full-blown, operational focus on continuous quality improvement. The deliverable must be open, clear and transparent, visible in quality measures and compliance history. FOCUS ON QUALITY AND IN SPECIFICS INCLUDING HAVING A FULL-BLOWN, FULLY INTEGRATED QAPI PROGRAM.
Resolution 2: The future is about patient preference and satisfaction. For too many decades, patients have gotten farther detached from what health care providers did and how they (providers) did it. No longer. Compliance and new Conditions of Participation will require providers to stop paying lip-service to patient centered-care and start now, to deliver it. The new environment is no longer just what the provider thinks the patient wants or should have but WHAT the patient thinks he/she wants and should have. TIP: Brush-up on the Informed Consent protocols! FOCUS ON PATIENT PREFERENCES IN HOW CARE IS DELIVERED, WHAT PATIENT GOALS ARE, AND THEIR FEEDBACK/SATISFACTION WITH SERVICE.
Resolution 3: Efficiency matters going forward. This isn’t about cost. It is about tying quality to cost and to a better outcome that is more economically efficient. The measurement here is multi-faceted. The first facet is utilization oriented meaning length-of-stay matters. The quicker providers can efficiently, effectively and safely move patients from higher cost settings to lower costs settings, is the new yardstick. The second facet is reductions in non-necessary or avoidable expenditures such as via Emergency Room transfers and hospitalizations/rehospitalizations. NOTE: This ties back to the first resolution about quality. MANAGE EACH ENCOUNTER TO MAKE CERTAIN THAT EACH OF LENGTH OF STAY IS OPTIMAL, AT EACH LEVEL, FOR THE NEEDS OF THE PATIENT AND THAT ANY COMPLICATIONS AND AVOIDABLE ISSUES (FALLS, INFECTIONS, CARE TRANSITIONS) IS MINIMIZED.
Resolution 4: The new world going forward demands that we begin to transition from a fee-for-service mindset to a global payment reality. This transition period will represent some heretical demands. While fee-for-service dies slowly as we know it, its death will include interstitial periods of pay-for-performance aka Value-Based Purchasing. Similarly and simultaneously, new models such as bundled payments will enter the landscape. Our revenue reality is moving and thus, a whole new set of skills and ideas about revenue capture and management must evolve. RESOLVE TO STOP LOOKING AT HOW TO EXPAND AND MAXIMIZE EACH MEDICARE ENCOUNTER. THE NEW REALITY IS TO LOOK AT EACH PATIENT ENCOUNTER IN TERMS OF QUALITY AND EFFICIENCY FIRST, THEN TIE THE SAME BACK TO THE PAYMENT SYSTEM. REVENUE TODAY WILL FOLLOW AND BE TIED TO PATIENT OUTCOMES, ETC.
Resolution 5: To effectuate any kind of permanent change, new competencies need development. Simultaneous, old habits non-effective or harmful, need abandoning. The new competencies required are care management, care coordination, disease management, and advanced care planning. Reward going forward will require providers to be good at each of these. Each ties to risk management, outcome/quality production, and transition efficiency. Remember, our rewards in the future are tied to efficiency and quality outcomes. Advanced Care Planning for example, covers both. Done well, it minimizes hospitalizations while focusing on moving patients through and across higher cost settings to lower cost settings. THIS IS THE YEAR OF BUILDING. RESOLVE TO CREATE CORE COMPETENCIES IN ADVANCE CARE PLANNING, CARE COORDINATION AND THE DEVELOPMENT AND IMPLEMENTATION OF BEST-PRACTICE, DISEASE MANAGEMENT ALGORITHMS AND CARE ALGORITHMS IN AND ACROSS COMMON DIAGNOSES AND RISK AREAS (e.g., falls, skin/wound, heart failure, pneumonia, infections, etc.).
Resolutions 6: The world of post-acute is changing. To change or adapt with it requires first and foremost, knowledge. Too many providers and often, leadership within don’t understand the dynamics of the environment and what is shifting, how and when. Denial cannot be operative and as Pasteur was famed to say, “chance favors the prepared mind”. Opportunity is abundant for those providers and organizations that are up-to-speed, forward thinking and understand how to use the information available to them. RESOLVE TO EDUCATE YOURSELF AND THE ORGANIZATION. KNOW HOW THE 5-STAR SYSTEM WORKS. KNOW WHAT VALUE-BASED PURCHASING IS ALL ABOUT. KNOW THE MARKET AREA YOUR ORGANIZATION IS IN AND HOW YOUR ORGANIZATION COMPARES FROM A QUALITY PERSPECTIVE (MEASURED) TO OTHERS. KNOW THE HOSPITAL PLAYERS AND THE NETWORKS. KNOW YOUR ORGANIZATION’S STRENGTHS AND WHAT IMPROVEMENTS NEED TO BE MADE.
Happy 2017! The beauty of a New Year is that somehow, we get a re-start; a chance to do and be different than what we were in the prior year. For me, I like the CQI approach best which is more about constant evolution than a wholesale, got to change now, approach. Success is about doing things different as realities and paradigms shift. We are certainly, from a health care and post-acute industry perspective, in a paradigm shift. Take 2017 and brand it as the Year to Become Different! The Year of Metamorphosis!
As alternative payment models expand and the options clarify, the post-acute segment of the health care spectrum faces a series of strategic questions, primarily;
- Join a network that exists or is forming be it part of an ACO, a SNP, a preferred provider organization in a Managed Medicaid state, or part of a bundled payment initiative
- Form one de novo – a SNP, a PACE, etc.
- Wait and see what evolves as certainly, much will change over the next two to four years.
One consideration that cannot be overlooked is that CMS plans on aggressively pursuing additional “value-based payments” at the expense of fee-for-service arrangements presently in-place. The process, if consistent with what has occurred in terms of roll-out/roll-forward, suggests a pace that will include new initiatives (e.g., bundled payments) every 12 months. Simultaneous or parallel to this movement, states continue to push forward on various hybrid Medicaid options including managed Medicaid plans, hybrid plans for dual eligible individuals, and the encouragement of more SNP and PACE options with some states offering incentives for formation (PACE Innovation Act allows for different program options with different benefit structures across more population categories. Also provides program opportunities for for-profit organizations).
The question oft asked these days is given the above, where to next for an SNF, a HHA, or even an ALF or Hospice? The answer starts with the market area and the dynamics within the market. The trends I see are truly unique and different region to region, market to market, state to state. For example, in certain states and regions, ACOs exist, are up and running, and have experience under their “belt”. In other states, ACOs are just forming or in some cases, re-forming post a distasteful experience and opportunities are fresh. In still other states, ACOs don’t exist and perhaps trial balloons have floated but nothing has persisted to conclusion.
The market factors that drive (majority of) network formation and thus, the maturity of the formation, the opportunities and the palate for additional or new ventures are;
- How much “managed” Medicare and Medicaid exists in the state, region, etc. and for how long. In markets with a large penetration of Medicare Choice plans, narrow networks and the experience and acceptance between providers is greater.
- Are ACOs up and running and/or forming. The more they are or are developing, the greater the interest in and opportunity for, network enhancement and development
- The market experience with early-phase, bundled payments via BPCI – the precursor to the current bundled payment initiatives. Similarly, whether the region is participating in the CCJR initiative or will in the new cardiac bundled payments.
No matter the dynamics of the market however, certainty does exist that post-acute providers must move to adapt to a value- based payment paradigm. How much risk a provider can and will accept depends on the provider, its existing care management acumen, its infrastructure maturity and its financial/capital position. Similarly, the evolution period that predominates the post-acute world now requires balance. This period is still fee-for-service heavy yet, transitioning (depending on regions, markets) to value-based payments. Providers must manage and excel at both though strategies to succeed in both are not mutually exclusive. Additionally, while payments are evolving, the compliance requirements are not. Oddly enough, the forthcoming revised Federal Conditions of Participation for SNFs will not in any way, provide accommodation for providers that work heavily in a transitional, post-acute world. The regulations are long-term care driven and heavily so in some cases wholly anathema to the transitional care world that is evolving.
Assumptively, this episode of care, value-based payment world is not going away. What this means is that survival in such a world for any post-acute provider is to avoid reactive strategy (defensive), instead applying resources and energy in the direction of the change. What I advise, before I answer the questions posed in the title, is as follows;
- Know your market and critically evaluate the landscape. What is going on in terms of Medicare Advantage plans, ACOs, etc.? If not done, have an in-depth conversation with hospital and physician referral partners regarding their approaches, strategies, etc. to bundled payments. Don’t be surprised however, if a level of vapor-lock exists. Be willing to forebear the task and direct some additional dialogue.
- Assess your organization critically. Where are your quality ratings and measures (stars, etc.)? How does your organization manage its lengths of stay, key quality measures (falls, hospitalizations, wounds, patient satisfaction, etc.)? Where is your HIS/MIS at? Can you communicate with other providers, provide physicians access, etc.?
- Can your organization make investments financially in infrastructure and staff realignment while still caring for a payer mix that is predominantly fee-for-service? Can you survive lower margins perhaps even losses while you transition? You may have extra staff temporarily, different staff, and more capital investment than typical.
- Can you laterally partner or downstream? For example, an SNF needs to find a HHA partner. What synergies in the market exist? Can (or will or already is) the SNF be in the HHA business? How about outpatient? How about physicians? Partner? Employ? Joint venture (careful here)?
Concluding: To the questions(s) posed in the title. Join? Yes, particularly if the provider is single site or limited sites in a region. Again, I am assuming the provider is prepared to join (I’ll summarize at the end). Source complimentary networks and get in and watch for opportunities in the market and within the network to develop additional product/service lines.
Form? Not unless the provider has mass, expertise and enough geographic span and parallel partner alignment to manage a population of at-risk individuals for capitated payments. This is a step that requires significant infrastructure and capital. A provider must have enough outlets and partners to manage population risk across a group exceeding normally, 10,000 lives (ideally larger). The common network models applicable for post-acute providers looking to form their own network are SNPs and PACE programs.
Wait? I can’t recommend waiting as doing so will leave any provider at peril of being left-out as networks continue to evolve. This said, a play cautiously strategy is fine provided that the provider or group is diligent and active in gauging networks and negotiating. A wholesale “wait and see what happens” is an ill-advised strategy.
Final Note: By prepared to join a network I mean minimally, having the following pieces with experience and data as applicable.
- Ratings at 3 Stars or better – ideally 4 or higher particularly in markets where multiple 4 star or better providers exist.
- A great QAPI program that monitors outcomes and tracks and trends quality data and quality measures plus patient satisfaction. Minimally, the provider should have data and analysis on infections, falls, wounds, hospitalizations, response times, other care transitions, length of stay, etc.
- A procedure and personnel to care manage referrals through a full episode of care.
- A process of sharing quality data and communication on patient care and service issues across provider segments.
- HIS/MIS at a level that allows certain functional connectivity between providers such as lab/diagnostics, hospital, physicians, pharmacy, etc. such that patient information can be communicated and acted upon.
- Parallel service partners (either owned or contracted with) across, up and down stream – physicians, hospitals, pharmacy, HHA, hospice, outpatient, etc.
- Care algorithms to support best practices for outcomes on key patient profiles (minimally, bundled payments) plus supportive protocols for key co-morbidities such as COPD, CHF, diabetes, peripheral vascular disease, depression, and other source acquired pressure injuries and infections. The latter are necessary to minimize re-hospitalization risk.
- Care staff trained and using INTERACT tools and versed in physician communication protocols, ideally from a source such as AMDA.
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.).
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.
The second most important function an executive and/or a governance board conducts (second only to planning) is risk management. This key leadership function is evolving rapidly primarily due to the evolutionary movement around compliance (ACA, CMS, etc.) and the payer focal shift from episodic, procedural care to outcome or evidenced based care, pay-for-performance, etc. Similarly, as government policy shifts so does commercial market dynamics with like movements toward pay-for-performance and disease management. While the core concept of “enterprise” protection remains the same, the scope today is different, the breadth wider and the responsibilities and tasks more structured than say, ten plus years ago.
Risk management is the term that encompasses a series of activities, programs, policies, etc. that work (ideally) together to protect and secure the overall enterprise/organizational identity, value, market share, legal structure and by downstream relationship, the stakeholders/shareholders. Its activities, etc. are passive and active. Passive activities (examples) include the purchase of insurance and implementation of firewalls and data security systems. Active activities include audits, training of staff, QA/QI activities, customer/patient engagement programs, etc. The purpose of this post is to focus on the “active” elements and in particular, the most important elements today given the evolving environment and the new risks emerging. The purpose is to frame a model of risk prevention culture rather than an environment fraught with rule deontology and protectionism. The latter tends to breed its own kind of risk(s) in addition to the risk(s) it seeks mitigate.
I like to think of effective risk management plans today as having six key elements. Importantly, the plan is not operative while the elements are. The plan is what the organization uses to monitor the completion (activities), ongoing improvement (identification and address of organizational weakness and vulnerability), and accountability of management in identifying and managing risk. Remember, these elements are the “active” side. I, for sake of the theme of this article, will assume that providers acquire adequate insurance policies utilizing industry professionals in their development plus that they maintain modern IT infrastructure to secure patient data, etc.
- Organizational Focus on Patient Care Quality and Service: This isn’t about slogans or marketing rather, it is about having an overall and deeply integrated culture around patient care outcomes and satisfaction. In a pay-for-performance, competitive, ACO world, this element is key.
- Executive and Board involvement in QA/QI, especially at the highest organizational levels.
- Compensation for management and executives incorporating (heavily) patient outcomes and satisfaction to the degree that all other elements are dwarfed by the weight given to this measure.
- Monitoring in-place of key patient outcome data and benchmarking of the same.
- Monitoring of response and wait times. This element is key as the goal is to create response times as near as possible/practical to immediate or to minimize wait times wherever possible.
- A program of patient/family engagement that includes surveys, focus groups, etc.
- A grievance resolution system that is open, accessible and seeks to address concerns as instantaneous as possible. The approach must be around resolving concerns without delay and bureaucracy.
- Staff training focused on customer service, QA/QI, communication and dealing with patient/family stress, trauma, etc.
- Engagement of staff in a “bottom-up” program or approach whereby lower level line staff are engaged in all training, QA/QI processes, mentoring, etc.
- Audit Contractors and Sub-Contractors: The use of contractors such as physician intensivists (hospitalists) and therapy companies, imaging companies, lab providers, environmental service providers (laundry, housekeeping, etc.) is on the rise as organizations seek to control costs and improve efficiency. Contractors, etc. yield new risk as their conduct, care, service, etc. create a risk transferable directly to the parent organization. The risk of course, is multi-fold. First, as applicable, is care risk (outcomes, service, competence, qualifications, insurance, etc.). Second, is labor risk (legal status, background checks, etc.). Third, is billing risk and compliance risk. If the contractor is involved in any element of care that is billable to a payer (Medicare, Medicaid, commercial insurance), the organization must assure complete compliance with billing and care provision rules in order to negate billing fraud or inappropriate claims risk (risk of non-payment or worse). Summarized, organizations must monitor and audit, externally, the work of contractors. Immunization clauses within contracts cannot supplant audits of risk areas proportional to the scope of the service agreement. For example, the organization must audit its medical staff, the care provided, documentation, billing as applicable, patient contact and satisfaction, response times, etc. The same is true for any care service contractor.
- Billing Audits: This element is particularly crucial for government programs such as Medicare and Medicaid. Providers today must get in the habit of reviewing their claims submitted to payer sources, particularly the government. Two huge risk areas are present today. First, focused fraud actions against providers under the False Claims Act. Audits here are all about making sure that what was billed was actually provided, documented, necessary and compliant. Second, billing accuracy such that claim submissions are “clean” and “accurate”. Denials for inaccuracy, etc. can lead to imbalances in error rates and thus, probes and claims held for review. The latter negatively impacts cash flow and staff productivity as extra work to justify payment is required. I also recommend that organizations be very, very careful about compensation programs tied to revenues and claims, especially without counter-balancing elements and a strong audit program. I like billing audits that are third-party conducted, benchmarked against regional and national data (our business should look like others in the region and nationally) and occur episodically and randomly as frequent as monthly and certainly, no less than quarterly.
- Organizational Transparency and Staff Engagement: A huge risk area providers continue to face is the mixed message and incongruent messages sent to staff from leadership and at the highest levels of the organization. The impetus behind so many False Claims investigations and actions undertaken by the DOJ (Department of Justice) isn’t smart federal auditors – its disgruntled staff. Whistleblowers are the fundamental impetus behind False Claims allegations and actions. Mitigating this risk is simple (beyond doing the right things of course). Organizations, especially leadership, must be transparent and as open and candid as possible. The point here is that there really is no reason to not share goals, plans, operating data, etc. with staff. When I was a CEO, my office was never locked and thus, work and files on my desk and credenza. My compensation was open and I did not hide what I made or how I made it. Not too surprising, across decades of running large healthcare organizations, I never had a fraud allegation or an allegation of any impropriety. Staff knew what the corporate plans were, how they achieved compensation and bonuses, etc. We gain-shared so staff had opportunities to reap reward as the organization grew and performed. Staff engagement means at the planning and implementation levels. It also means active programs of training and a large amount of dialogue regarding why the organization does what it does and where the right and wrong lie. The same Whistleblower mentality is also fundamentally sound when it is used to police bad internal behavior, including that of management.
- Focus on Competence: A simple thing but rarely do I see this element boldly, prominently emphasized. Competence is about the ability to do what is required at the professional, validated level. It is about validation of core skills and abilities within a framework of education and testing. Organizations that focus on developing and maintaining staff and managerial competence limit risk inherently. All together, risk is often a byproduct of incompetence and protection of a weak, status quo. If excellence and competence is demanded and the systems engaged and in-place to assure it, then there is little room for marginal, sub-standard and incompetent to remain. How does an organization focus on competence? First, eliminate old, worn out HR policies and job descriptions and performance evaluations and replace the same with competency and behavioral standards. Competency standards are the elements one must demonstrate and perform as part of the job at a repetitive, proficient level. Behavior standards are the elements of personal conduct and accountability that the organization demands (uniforms, attendance, inservice attendance, etc.). Evaluate standards routinely, move in new skills, refine old skills, educate and test. Require ongoing passage and demonstration and be intolerant of employees and managers that can’t/won’t meet the competency and behavioral requirements. Competency standards are required for ongoing employment; reward for performance thus can only and should only occur when the base standard is consistently exceeded.
- Be Public: By employing all of your constituents in oversight, the likelihood of getting surprised or being caught off guard is minimized. Be public as possible with standards, expectations, contact information, grievance steps, etc. Be open to all criticism and frankly, demand (as much possible) feedback regarding just about anything in the business. No reason that business goals can’t be public and yes, even margin goals. Heck, explain why margins are necessary. Engage the broader universe and community and ask for input and reactions. People will tell you the good, the bad and the ugly – the latter being where potential risk lies. Force the conversation and the accountability and in doing so, limit a large area where risk can fulminate.
One of the top questions I’m asked by clients, readers, students, and interested parties everywhere is how can my organization excel in a competitive environment. In other words, how can I build my organization’s value proposition such that the organization becomes the provider of choice in the market? My answer is always thematically the same: Be different in a way that is perceptible and tangible to the market and to the trends in the industry. Think Apple. Apple is constantly rolling forward new technology to feed the trends and its customer base iterations (the changes that occur among its customers as each Apple release begets more desired upgrade on behalf of the users).
Before I give out five rock solid strategies that any SNF can pursue, I need to frame what not to do first or specifically, what won’t work. First, building the organization’s Medicare star number by manipulating the input data on staffing, quality indicators, etc. Waste of time, perilous on a number of levels and ultimately, a no -win unless compliance surveys correlate to the 4 or 5 star level. Second, baiting, paying, cajoling and/or bribing referral sources (discharge planners and physicians). This is fraud and while it may work in the short-run, in the long-run it won’t plus its illegal (for those saying this doesn’t happen, guess again – I see it all the time). Third, marketing and advertising without the requisite pedigree to back it up. All the words and images don’t and won’t work if the product isn’t there and the experience on behalf of residents isn’t good.
On to the strategies. These work for a number of reasons but most importantly, because they are cutting-edge, fit the health policy landscape, and are patient/family centric. Additionally, none of these is expensive, though each requires some investment -just not mega-bucks. Once operative, each is a difference marker and likely, not repeated within a given market area.
- Excel at Food: Institutional food service whether outsourced or produced on-site is the bane of residents and families from a service and quality perspective. Further, it is unnecessarily clinical. The trend is complete de-institutionalization; top to bottom. First, ditch all diets – one general diet is fine and preferred. It is the facility’s job to manage resident weight, health, etc. and special diets just aren’t required. Second, quit modifying food products and fluids chemically or mechanically. Use food to create substitute products with recipes and to modify products for thickness, texture or consistency. Find a culinary school or good chef near your facility for pointers here. Have great food and diets that any resident, under any condition will rave over and the facility will rise immediately to the top of the market, at least in this category.
- Excel at Care Coordination and Advanced Care Planning: Advanced Care Planning is all about helping residents and families make good choices with regard to care and treatment decisions. Healthcare people and especially institutional care sites stink at this. Being great means knowing how to have the right conversation at the right time and having resources available to help people make good decisions. Think of how many dollars can be saved in everything from unnecessary meds, to unnecessary tests, to reduce hospitalizations, ER visits, etc. with proper communication around risks and benefits and individual choices. Likewise, great pre-admission planning and discharge planning wrapped around Advanced Care Planning will lead to fewer hospital re-admissions, more complete care on discharge, faster care on admission (fewer delays in care), and enhanced staff productivity (particularly nursing) as less time is spent on phone calls, communicating non-critical labs, etc. Excel at this and watch hospital referrers, physicians and satisfied residents/families laud your facility.
- Excel at Behavior Management: This is all about reducing unnecessary drugs plus improving the care of behavioral challenged residents. The latter includes the ability to “step-up” your rehab and restorative nursing programming, even for the dementia afflicted. This is all about training and employing the techniques that are available from organizations such as CPI and TCI (Crisis Prevention Institute and Therapeutic Crisis Intervention). Residents become medicated most often for staff convenience and conformity with the institutional environment. Train all care levels and support levels in how and why behavior occurs, make simple changes, and meet as a Behavior Team regularly and watch overall resident behavior decrease, staff confidence rise, crisis and panic reduce and residents and families become happier. Likewise, facilities which become really good at crisis and behavior management become a resource for the community – a center of excellence.
- Get Connected: For a minimal investment, get your facility on the web and if it already is, build its own ap! Develop a patient/family access point with all kinds of information and resources about everything common to resident questions, family concerns, etc. Use Skype as an activity and as an options for families to watch an activity, to talk to the doctor and/or to participate in a therapy session with their loved one. Connect with a local tech school or university for cheap talent maybe, talent which is free as part of an internship.
- Bring it In-House: This strategy requires the most investment dollars but again, not a ton if done right. The more internal capacity/competency that is available on-site, the fewer care transitions the facility will experience. Fewer care transitions = lower risk. Fewer care transitions reduces and/or eliminates, delays in care. The list here is lengthy but any of the limited following are inexpensive (relatively) and simple: I&Rs, mobile x-ray with digital results, on-site swallow studies via FEES, IV starts including PIC lines, fluoroscopy, Doppler studies, EKGs, in-house therapy (non-contracted). Each of these can be a simple, huge improvement and none require a six figure investment or even half of a six figure investment.
Accomplish any of the above, a few of the above or all of the above and communicate and market the same within the facility’s market area and start becoming the provider of choice.
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;
- 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).
- 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.
- 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.
- 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.
- 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.
In news just released, Kindred (the post-acute, skilled, rehab and LTAcH behemoth) has made two separate offers to purchase control of Gentiva, the latest a $14 per share offer consisting of half cash, half stock ($7 and $7). An earlier offer of $13 per share was rejected and it appears the $14 offer will see the same fate. Prior to the news, Gentiva stock was trading in the mid $6 range, down 20% over the preceding 12 months. The value of the “deal” is pegged at $1.6 billion with $533 million of the total in cash and stock, the balance in assumed Gentiva debt. On a combined basis, Kindred/Gentiva would weigh-in at $7.2 billion in annual revenues, operating in 47 states.
To date, Gentiva has held fast that it is not for sale and that its present plan, implemented as One Gentiva will create more shareholder value over-time than the Kindred offer. In December, I wrote a similar analysis post on Gentiva/Harden (the merger) and the home health industry. The post can be found at http://wp.me/ptUlY-fV . In this post, I commented on the clear flaws in the One Gentiva strategy; principally the broadening of reimbursement risk strategy that is at the core of this strategy. While Gentiva posted a modest recent quarter profit after $180 million loss, virtually all of the reported gain was a result of accretion from the Harden transaction, not improved operations. For example, adjusted income attributable to Gentiva shareholders for the first quarter 2014 was $4,8 million compared to $7.1 million twelve months prior. Net cash provided by operating activities for the first quarter was negative $17.7 million vs. negative $20.6 million one-year prior – not a resounding improvement. Essentially, the fundamentals of the company are not improving and in some cases, set to erode going forward as the lion share of its revenues are Medicare home health and Medicare hospice (Odyssey) driven (88.5%). Both Medicare programs face down reimbursement trend pressure, home health dramatically more so than hospice. Hospice however, is under enormous industry-wide pressure due to continued fraud investigations among major players and the loom of federal program reform (the Medicare hospice benefit). Essentially, hospice is a no-growth industry now.
Reviewing multiple factors and general industry trends plus the health policy and economic outlooks for both companies and the post-acute industry globally, below is my analysis of the factors influencing (or should influence) the Kindred and Gentiva position.
Kindred: Where Gentiva has a reimbursement risk concentration problem, Kindred has a location of care or outlet concentration problem. Kindred is brick and mortar deep/heavy, actually too heavy. Institutional outlets, especially in-scale and capacity are shrinking. The revenue needs required to support institutional care, on a post-acute basis, are increasing while reimbursement is flat to falling. The LTAcH and SNF trends are flat and the operational efficiencies available to any provider are minimal, save offloading or minimizing debt. The quality expectations evidenced in regulation and pay-for-performance models won’t allow any significant reductions in variable costs today. To be an institutional player of success, one must have broad clinical capacity, right-sized bed compliments that match payer demand (occupied by the highest payers at high occupancy levels) and non-institutional outlets to capture discharge revenues plus participate in global contract arenas and networks (ACOs, etc.). Kindred lacks the home health/hospice scale, especially on a matching outlet basis in its respective markets. Gentiva adds this element, though at a bit of a risk via the amount of debt that Kindred would assume. The acquisition is not without risk or a sure-winner. True Gentiva brings the home health/hospice/community care component that Kindred needs as well as the scale to be immediately impactful, it simultaneously adds another level of reimbursement risk and industry risk that Kindred already has on a large-scale. Managing and integrating the Gentiva elements into Kindred’s longer range provider of choice model will not come easy. Likewise, the Gentiva acquisition will only mask temporarily, the fact that Kindred needs to right-size its own portfolio post its acquisitions of Rehabcare and Integracare (the latter a Texas limited home health/hospice provider) while still holding and operating, too much inpatient real estate that isn’t optimally performing in many markets. In essence, the play makes sense but not fully positive until all the pieces are brought tightly together; a difficult and time-consuming endeavor.
Gentiva: Gentiva has the same problems that Amedysis has and had – it needs to shrink but it can’t. Gentiva has too much debt and in a reimbursement environment that trends flat to down, it cannot grow itself out of its debt problem by “more of the same”. It’s diversification strategy through the Harden acquisition is too little, too late and not scalable fast enough to have meaningful impact. It similarly, can reduce expenses fast-enough via consolidation as it must chase revenue growth to survive and the revenue growth that pays the most is Medicare – a risk concentration it already has too much of. It needed to re-tool 8 to 10 years ago, balancing its revenue model and expanding its clinical capabilities beyond the typical home health outlet. Additionally, it needed to become more local-market centric and not simply a Medicare reimbursement machine like Amedysis (an accident waiting to happen). The notion that its One Gentiva plan can create more value for Gentiva shareholders that the Kindred offer is wrong-headed. Sans takeover talk, Gentiva trades between $6 and $8 and no upward trajectory is visible. A simple return analysis illustrates that a Gentiva shareholder will wait at least 18 months or more to equal a return of $14 today, excluding opportunity costs on the investment. Similarly, the risk concentration elements that could turn such an outlook even more dire are more than double on the Gentiva holding than on a comparable dollar for dollar holding with Kindred. Kindred simply has more ways to generate revenue, a more stable expense base, lower fixed costs and less reimbursement risk concentration than Gentiva. If Gentiva chooses not to sell, holding out for more than $14, I think the shareholders will pressure such a move in the near-term future. The Kindred offer, with debt assumption is in my opinion, a max value offer that 12 months from now, is off the table.
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.
Among the improvement laggards in the current slow economic recovery was the real estate sector of the economy. Despite record low borrowing rates, home sales seemed stuck in neutral even as positive GDP growth resumed, modest gains in employment occurred, and consumer confidence improved.
Starting late summer 2012 and accelerating in to 2013, the real estate economy has strengthened and improved nicely. Historically, a healthy real estate economy correlates to strong seniors housing starts, sales and occupancy. With many major markets over-supplied as of late in terms of seniors housing units (demand perspective), an improving real estate economy, if trends hold true, imparts hope for the seniors housing sector – or does it?
Seniors housing, as I have written before, has a very price elastic demand curve. Essentially, this means that potential buyers and the universe thereof, is directly influenced by the cost of the housing option. Even when costs remain stable, the demand equation changes dramatically if the buyer for the units experiences change (real or perceived) in his/her economic capacity. Negative changes such as falling real estate prices, constrained ability to liquidate real estate, or reduction in the number of potential buyers for the real estate contribute directly to a senior’s ability and willingness to purchase a seniors housing option. The most dramatic impacts occur within projects that are above-market priced or higher-end as the elasticity of demand for the most expensive options is greatest. In effect, the higher the price the more the consumer of the product or service, will shift to lower cost alternatives, if his/her ability or capacity to purchase has changed (again, real or perceived).
What is most interesting about the real estate economy compared to other economic sectors is that national trends don’t play-out directly, in regional or local markets. Take for example, markets or regions where oil and natural gas production has exploded. Even during the slowest, most depressed times for the real estate economy nationally, the real estate sector in these regions and locales was booming. Housing of any form in areas such as Casper, Wyoming and Williston, North Dakota was (and remains) scarce, pricy, and by timing (supply and demand), development scarce. Conversely, some markets fared far worse than national trends in terms of foreclosures, time on the market and price deflation (Las Vegas and Chicago, IL are examples). Given the regional drivers that impact the real estate economy, recovery will vary dramatically.
Correlating a recovering real estate economy to an improving seniors housing sales and occupancy cycle is simplistic from a global perspective but at the site-specific end, a bit more daunting. What we know generally is that a more fluid, stable real estate market generally improves the occupancy, unit absorption and sales results for seniors housing. We also know that in general, by occupancy and ultimately, price inflation, it improves the operating results of seniors housing projects. What we don’t yet know is whether this recovery is a harbinger of longer-term real estate stability and does the improvement tide wash over all markets at some point and in what time frame.
Arguably, this recovery is perhaps different, certainly less uniform and due to other over-arching economic issues, more complex than any post recession period prior. In certain markets, those that were the least impacted by too much existing supply, rapid increases in unemployment and a large number of foreclosures (REO or REJ properties), recovery is impactful for seniors housing projects, especially if the unit supply is normative or about par with pre-recession demand. In other markets where prices fell dramatically, foreclosures were heavy and unemployment greater than national average, recovery will be slow. Even the latest positive economic news regarding the real estate economy is a tad misleading. Yes, most markets are improving. Yes inventory is down, days on the market is improving, listing prices are recovering, etc. (a few markets such as Columbus, OH, Philadelphia, PA and Spokane, WA continue to see price deflation) but the improvements are from a very, low point. In short, the improvements are signs of “recovery” not a validation of stability – yet.
While the road ahead appears somewhat smoother, the opportunity for pot-holes exists and thus, the relationship between real estate fortune and seniors housing is still rocky. My considerations worth noting are as follows.
- Employment and wage growth (personal income) is still stubbornly slow. Under-employment at record highs.
- In some markets, employment and under-employment will never return to post-recession levels. Certain jobs and companies are gone from the landscape for good.
- Interest rates today are less of a function of improving sales even though low rates improve affordability and thus, general increases in eligible buyers. Changes to federal lending laws and mortgage requirements have tightened credit requirements for borrowers. These changes, regardless of how low rates remain or go, preclude a large universe of individuals from securing favorable term mortgages. In short, the supply of buyers has shrunk and permanently so.
- Given how low rates have been and for how long, rate rise to a certain degree is forthcoming. Rising rates inversely impacts the supply of buyers (negatively).
- Price increases for individual homes won’t broach pre-recession levels (actual or inflation adjusted) for years in many markets. In certain markets such as the Metro Chicago region, price increases in terms of realized sales, are years out to achieve pre-recession par.
- The overall economy is still vulnerable and the consumer, still leery of what can lie ahead. Confidence is better but not great. Consumer confidence is critical to a buyer’s willingness to leverage long-term, arguably as critical as financial capability to buy.
- Seniors housing costs are at their low-ebb as expressed by monthly rental and in some communities, entry fees. While costs continue to rise, albeit not dramatically, the pressure to begin to inflate fees is present for many projects. Fee inflation during a recovery period or stabilization period is anathema to improving unit sales and developing new prospects. With the elasticity of the product, rising rates in a market that still isn’t healed can “chill” prospective buyers.
Is the trend improving for seniors housing? Yes but not universally and the real estate economy in many regions remains disconnected. Additionally, I think the direct correlation between a strong real estate economy and the prospect for seniors housing sales has changed. Yes it remains a major factor but property sales cycles will remain slower than prior periods, prices lower than prior periods, and buyers for individual homes, in lower numbers than in prior periods. The take-away is this: The improving real estate economy is good news, not necessarily great news or for that matter, a sign of salvation for projects looking to ramp-up sales with urgency. The trend is improving but full improvement, is still down the road and for certain, the road is different in direction than before.
In spite of best intentions, wicked winter weather across the middle U.S. has kept me off-track a bit and thus, I haven’t quite met my goal of having these all published by Valentine’s Day. Below is my and my firm’s consensus Outlook on the Home Health industry for calendar year 2013 (part FY 2014).
Summary Comments: While we are bullish on organic patient volume growth, we are tepid on earnings growth for most providers. The primary reason? A continued federal onslaught to reduce and rebase, Medicare payments to providers. Where we are bullish for the future is the prospect for industry growth in “new” payment models; namely ACOs and Bundled payments. The trick with these new payment models is for the industry to fine-tune its role, its operations, and its ability to manage a more risky patient profile than found in the traditional, downstream fee-for-service environment of current. The very nature of the new payment models is to shift or transfer certain risks to lower cost providers. In this role, the post-acute industry and Home Health specifically, will find that managing a more complex patient is required while doing so efficiently and economically is the overarching requirement for success.
In the interim period as the industry is finding new footing in the ACO/bundled payment environment, revenue crunch will continue. Medpac is recommending continuing rate reductions principally via rebasing the Home Health PPS and eliminating the market basket adjustment. Muddying this approach a bit is the loom of Sequestration cuts. Additionally, states continue to struggle with Medicaid. In October and in briefs of support on behalf of California to reduce provider payments, CMS and the Obama Administration argued in favor of a state’s rights to reduce provider payments. While California is an outlier in terms of state fiscal health, the resulting support from CMS implies wide latitude will be given to states in terms of structuring payments if in fact, the states can provide supporting evidence that access will not be compromised. Our quick assumption is that most provider segments demonstrate enough overall capacity that states will win the argument that rate reductions won’t adversely impact patient access.
Medicare : Thanks to prior decade payment machinations set-up by Congress to address a perceived access issue to patients requiring more therapy, the industry has since felt a backlash of negative activism with regard to Medicare and perceived (and in some cases real) overpayments for care. As convoluted as this sounds, the crux is that Congress incented certain behaviors, providers took advantage of the incentives and all of sudden, Congress rises again and screams “fraud”. Coincidentally, the FRAUD cry came when margins for providers crept near 20% on their Medicare book of business. Suffice to say, we didn’t see anywhere near the fraud alleged moreover, providers properly taking advantage of an imbalanced payment system. The whole story here reminds us a favorite children’s book: “If you give a Moose a Muffin….”.
Medicare spending on Home Health approximates $19 billion. Per Medpac, margins in 2013 on average, should be 11.8%, down from 14.8% in 2011. The change is entirely due to rate cuts and market basket adjustments. Effectively, CMS has been imputing rate reductions for what it believes are agency inappropriate case-mix reporting and utilization. The ultimate challenge facing the industry is rebasing: A rebalancing of sorts, adjusting payments across the 153 HHRGs to more accurately reflect (CMS language) provider costs of providing care and desired outcomes of care as measured by OASIS – the industry clinical and functional assessment tool.
If we follow the Medpac/ACA pathway and assume CMS and Congress stays the course similarly, what we see is as follows.
- Rebasing in 2014 -2016: The ACA directs the Secretary to accomplish this task with no more than a 3.5% reduction in payments in any one year equalling a cumulative impact (reduction) of 14% by 2016.
- In 2015 and all following years, market-basket adjustments are offset by a productivity factor.
- Net one and two above for the actual rate impact – a positive market-basket minus the productivity factor still positive, reduces the rate cut impact, etc.
Medicaid: Coverage under Medicaid for Home Health varies widely state to state. States that have adopted and aggressively expanded Home and Community Based Services programs offer more expansive coverage than states that have not. The trend we are seeing literally state to state is a global re-think of HCBS coverage and payments. HCBS has grown in popularity and states are finding that while attractive, the programs are fraught with adverse selection risk (way more beneficiaries in queue than the states believed or desired and spending levels higher than forecasted).
Under Medicaid, each state is only required to offer coverage for Home Health to individuals receiving federal income assistance (Social Security and AFDC) as well as individuals who meet specific need categories such as the blind, disabled, etc. States may expand upon the eligibility criteria but are not “required” to under federal law.
We have seen most states widely expand eligibility, principally as a means of forestalling institutionalization. Most of this expansion occurred pre 2008 or pre financial collapse. Today, states are re-considering the impact of expansion and many, like California are seeking injunctive relief from CMS. What we don’t know as of yet is how Home Health, Medicaid and Medicaid expansion all fit together. We think most states will approve Medicaid expansion hoping that the influx of federal dollars will abate the need to cut programs and payments, some no doubt negatively impacting the Home Health industry. From our view, it is entirely a per state guessing game as each state has different fiscal challenges and different levels of Medicaid enrollment. Thus, we also believe each state will de facto ration any new dollars from the federal government into Medicaid programs that the state believes are a priority. In short, our consensus outlook on Medicaid for Home Health is flat as we are taking a wait and see approach. We are confident however, that HCBS programs will not significantly grow and in most states, will continue to contract in terms of payment and enrollment (states capping program enrollment).
A final Medicaid comment concerns the number of states aggressively moving toward “managed” Medicaid. While early in this transition, this movement may prove fruitful for Home Health agencies if they can plow the dual eligible ground and show high quality and lower overall spending. Managed Medicaid exists, in theory, to help states constrain program growth via redirecting utilization and redirecting payments. High quality, lower cost services are favored and thus, Home Health agencies properly aligned may do well in this environment. Careful negotiation and skilled care management of patients between provider segments is required to profit and achieve tangible volume.
Other/Miscellaneous: In 2012, the OIG/CMS released a report regarding inappropriate billing activities among certain Home Health agencies. The report indicated that within certain geographies and among certain agencies, across 6 measures of questionable billing practices, the OIG noted that one in four agencies exceeded the threshold in at least one of the 6 measures used, thus indicating possible billing abnormalities. The states with the most suspect agencies with billing anomalies are Texas, Florida, California and Michigan.
In the 2013 OIG workplan, focus is provided for the HHA face-to-face requirement. In a 2012 report, OIG found that only 30% of beneficiaries received an actual face-to-face encounter with the physician that ordered their care. Additional focus is provided on agency screening tasks required to eliminate employment of individuals with precluded criminal history. Finally of note, the OIG will focus on OASIS submissions from providers. Specially, the OIG is looking to make sure providers are submitting their required assessments plus including proper billing codes matching the assessment data.