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.
- 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
- 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.
- 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.
- 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”.
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?).
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.
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.