Reg's Blog

Senior and Post-Acute Healthcare News and Topics

Post-Acute, Site Neutral Payment Upcoming?

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

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

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

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

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

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

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

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

Advertisements

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

Five Post Acute Axioms (Truisms)

I read a lot – part of the job.  I hear lots of conversations and participate in many in-person and online.  Last week, I spent a few evenings with my rehab partner.  Between he and my wife, with clients across the country, it was fascinating how the conversation regarding fortune or famine (providers) boiled down to a few simple truths.  Summarizing, those that do well have accepted and work doggedly at embracing and living out these axioms.  Those that are struggling, simply refuse to grasp these plain truths.  Regardless of the entity (SNF, HHA, etc.), these axioms apply (truthfully, for any provider including hospitals).

To preface, I’ve slimmed-down hours upon hours of recent conversations to these five “axioms”.  One could argue more apply.  Between my partners, my wife (a partner) and me, we have some context here as we work with multiple entities that rank in the top 1,000 post-acute providers in the nation.  For example, we all share a working relationship with the 6th ranked SNF in the nation, out of 15,636 SNFs.  Unfortunately, we also have client relationships with the lowest ranked providers including one that ranks 15,609.  This dichotomy (cruel as it is) gives us a unique perspective regarding truisms (embrace them and succeed, ignore them and fail).

  1. Quality Matters: This isn’t about hype or verbiage; it’s about results.  Organizations that are succeeding are doggedly, persistently and hyper-fixated on their care outcomes.  Their culture is deep in quality and they benchmark themselves and what they do, how they perform, with an effort on getting better all the time.  Their outcomes demonstrate their quality.
  2. Staffing Matters: Providers that perform invest in and have in number, great staff perform better.  They put the right people closest to the patients.  They have assessed their operations and know precisely, what levels of staff by credential and education, their operations require.  They train, teach and invest in their “troops”.  You won’t find a great SNF that doesn’t have RNs on every shift, every day.  You won’t find a great provider, HHA or SNF, etc., that doesn’t have actual employees, not contractors, taking care of patients (primarily).
  3. Excellence in Management and Leadership is Imperative: The best have long-term, highly qualified management and leadership at every level in the organization.  They retain great talent and grow it like a prized rose-bush (ever watch rose “aficionados” you’ll get the reference). These folks aren’t the highest paid or even with the most credentials; they are excellent directors of task and people.  The most credentialed (education, certifications, etc.) don’t correlate to the best manager or leader.  In a nutshell: Excellence here means bright, strategic, engaged, earnest, industry and trade experts, that are quality driven.
  4. The Devil is in the Details: The best providers are not just current with policy issues and reimbursement trends, they are ahead and know the implications and manage to these details.  For example, they know length-of-stay matters and they are working to shorten each encounter to only the resources required (days, visits, etc.).  Their quality measures are excellent because they review the dozens of measurable data points to look for trends and to track outcomes.  They have protocols and disease pathways in-place.  They adopted antibiotic stewardship practices before the buzzword existed.  They already were on pain and the management thereof, without or minimizing opioids, before alarms sounded.  They had steps in place to quality review care transitions and hospitalizations.  QAPI was something new but not to them.  Doing things right was and still is, the driver for these excellent organizations.
  5. The Organization is like a Car: This is meant to be a silly reference but also serious.  Driving is all about what is going on ahead of you and being anticipatory and prepared.  The rearview mirror is checked but only briefly.  Failure to pay attention to the road ahead and anticipate hazards, keep safe distances, etc. is how one arrives at a destination, safely and efficiently. Think of it this way: Slow is smooth, smooth is fast (an old and time-honored, Special Forces reference). Great providers embrace this philosophy – do things slowly, smoothly to be able to respond quickly when necessary.  What differentiates the very best providers from the very worst is their focus on FORWARD – being very anticipatory and developing core, innate competencies that help be “smooth and fast” as adaptation is required in health care.

Food for thought.  If one chooses to use the above points on a comparative basis, my guess is you will find what I know.  The best embrace these axioms.  The worst don’t or don’t consistently.  Everyone else in the middle has a choice to make – get better or get worse.  The truth about “great’ in health care is easy to understand.

 

July 16, 2018 Posted by | Home Health, Skilled Nursing | , , , , , , , | Leave a comment

Stuck in Neutral: Bundled Payments and Post-Acute Providers

After CMS nixed the mandatory expansion provisions for Bundled Payments and reduced the metro areas participating in CJR (joint replacement), the prospects for post-acute provider involvement in non-fee-for-service initiatives (payments and incentives based on disease states and care episodes) went in to limbo.  With a fair amount of excitement and trepidation building on the part of the post-acute world about different payment methodologies, new network arrangements, new partnerships, incentive possibilities, etc., CMS put the brakes on the “revolution”; a screeching halt.

While Bundled Payments aren’t dead by any means, the direct relationships for post-acute providers are in “neutral”.  The Bundled Payments for Care Improvement Advanced (BPCI Advanced) initiative announced in January included no avenue for SNFs, HHAs (home health) to apply and participate.  Nationally, other voluntary bundle programs continue including the remnants of CJR, and Models 2, 3 and 4 in Phase II.  According to CMS, as of April of this year, 1100 participants were involved in Phase 2 initiatives.  The Phase 2 initiatives cover 48 episodes of care ranging from diabetes, through various cardiac issues and disease to UTIs.

BPCI Advanced opportunities (episode initiators) involve hospitals or physician groups.  Post-acute will still play a role but the direct connections and incentives aren’t quite tangible or specific, compared to CJR.  Time will tell how the roles for post-acute providers evolve in/with BPCI Advanced.  Oddly enough, the economic realities of care utilization and negative outcome risk suggest that post-acute should play a direct, large role. As hospital stays shorten, outpatient and non-acute hospital surgical procedures increase, the directed discharge to post-acute has taken on greater meaning in the care journey.  HHAs in particular, are playing an expanded role in reducing costs via enhancements to their ability to care for more post-surgical cases direct from the hospital/surgical location.  Simultaneous however, readmission risk exposure increases.  What is certain is that system-wide, the window of 30 to 90 days post hospital or acute episode is where significant efficiency, quality and cost savings improvement lies.

While the direct opportunities initially forecast under BPCI for the post-acute industry have evaporated (for now), strategic benefits and opportunities remain.  Providers should not stray from a path and process that focuses on enhancing care coordination, improving quality and managing resource utilization.  Consider the following:

  1. For SNFs, PDPM (new proposed Medicare reimbursement model) incorporates payment changes and reductions based on length of stay (longer stays without condition change, decrease payment after a set time period).  A premium is being placed on getting post-acute residents efficiently, through their inpatient stay.
  2. For HHAs, payment reform continues to focus on shorter episodes in the future.  Like PDPM for SNFs, the focus is on efficiency and moving the patient through certain recuperative and rehabilitative phases, expeditiously.
  3. Medicare Advantage plans are increasing market share nationwide.  In some markets, 60% of the post-acute days and episodes are covered by Medicare Advantage plans – not fee-for-service. These plans concentrate on utilization management, ratcheting stay/episode length and payment amounts, down.  Providers that again, are efficient and coordinate care effectively will benefit by focused referrals and  improved volumes.
  4. Quality matters more than ever before – for all providers.  Star ratings are increasingly important in terms of attracting and retaining referral patterns  Networks and Medicare Advantage plans are focused on sourcing the highest rated providers.  Upstream referral sources, concerned about readmission risks are targeting their discharges to the higher rated providers.  Consumers are also becoming more market savvy, seeking information on quality and performance.  And of course, government programs such as Value-Based Purchasing place providers with poor performance on key measures (readmissions for SNFs) in the reimbursement reduction pool.
  5. Indirectly, Bundled Payment initiatives move forward and the Advanced option will require physicians and hospitals that participate, to source the best referral partners or lose incentive dollars and inherit unwarranted readmission risk.  SNFs and HHAs that excel at care coordination, length of stay management, have disease pathways in-place, can manage treatment, diagnostic and pharmacology expenses and produce exceptional outcomes and patient satisfaction are the preferred partners.

June 29, 2018 Posted by | Home Health, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , , , , | Leave a comment

Home Health and Hospice: Strategic Movement in an Evolving Market

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

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

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

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

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

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

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

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

 

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

Is a Paradigm Shift Starting in Senior Living?

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

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

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

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

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

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

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

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

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

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

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

 

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

SNFs and the Medicaid Conundrum

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SNF Outlook: 2018/2019

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

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

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

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

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

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

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

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

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

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

Happy New Year!

Welcoming in 2018 with a bunch of new content and enough cold weather and limited travel over the next month to get some new posts up.  I apologize to the loyal readers and subscribers that have patiently waited for new content.  A horrendously busy (non-typical) end of the year limited my writing/composing time.  Thanks for waiting and stay-tuned; plenty of new stuff forthcoming.  Happy New Year!

January 15, 2018 Posted by | Uncategorized | , | Leave a comment

Medicaid Reform: Hope for Taming the Gorilla?

A few weeks back, I wrote a piece regarding Medicaid and its ties to the fortunes (lack thereof ) of some the largest SNF provider groups. Today a high percentage of resident census connected to Medicaid as a payer source is the largest contributor to the flagging financial condition of Genesis, HCR/ManorCare, Signature, and others.  With large losses stemming from inadequate Medicaid payments and shrinking sources of offset via Medicare (for a number of reasons), these organizations are perilously close to bankruptcy (or are fundamentally there as is the case with HCR/ManorCare).  For reference, see the previous post at  http://wp.me/ptUlY-mC

As I talk with investors across the nation (and internationally in some cases) interested in the fortunes of the REITs that hold a ton of the Genesis, HCR/ManorCare, et.al., assets (buildings) and or the fortunes of the companies themselves (Genesis is publicly traded with a stock value current, hovering just above $1 per share), I field the same question(s) repeatedly.  How did we get here and what needs to change for these companies to survive, or can they?  Quickly, allow me to recap where the SNF industry and particularly the groups aforementioned and others like them, is at.

  • First and most crippling, their dominant payer source is Medicaid. In the case of Genesis and HCR/ManorCare, above 66% on average in each SNF.
  • Medicare Advantage is a growing piece of the Medicare payer equation. In some markets, Medicare Advantage plans account for more than 50% of the Medicare patient days in a SNF referral stream.  These payers (the Advantage plans) are paying at Medicare MINUS levels.  Medicare minus 10% is phenomenal, if attainable. In most markets the discount is greater.
  • Most markets have a surplus of available SNF beds (nationally too).  Competition among providers is fierce for quality mix (better payers).  Because of this, the Advantage plans do not (yet) need to negotiate favorable terms as someone, somewhere will accept the discount; preferable to the vacant bed.
  • The policy landscape is adjusting to a new reality in which Stars matter.  Higher rated (Five Star) providers are now favored by payers, providers and consumers alike.  The steerage has started and it won’t subside.   Hospitals to physicians to consumer groups and payers preference is toward providers rated 4 Stars or higher.  While this pressure is yet overt, its subtle and growing and I hear it constantly as hospitals for example, won’t abide readmission risk and if they are in bundled or other at-risk payment projects (physicians too), they seek better partners (quality ratings) to handle their referrals.
  • There is a distinct preference shift among physicians, consumers and payers (bundled for example as well Medicare Advantage) to minimize inpatient stays both by length or by necessity.  Certain orthopedic profiles that once were a SNF staple (joint replacements) good for a 20 plus day Part A stay at high therapy RUGs either don’t last 20 days or don’t get referred at all.  I am seeing a wholesale shift of these patients to home health and outpatient primarily, followed by short (demanded) stays, 40 to 50% fewer in days, on an inpatient basis.  This volume change has demonstrably hurt certain SNF provides formerly reliant on it to offset Medicaid losses.
  • The physical plant assets are old, oversized, and dated.  The new, successful SNF model is smaller buildings, all private rooms, nicely appointed.  Genesis, et.al., represent some of the largest and oldest plant assets in the industry.  They are inefficient, institutional, and in many cases, burdened by high rent payments and comparably, high levels of deferred upkeep and maintenance (particularly interiors and movable equipment). Wholesale renovation is impractical as the investment is greater than the return on assets attainable now and across the near-horizon.
  • The regulations, especially the newly updated Federal Conditions of Participation for SNFs, phasing in as I write, are crippling to these providers.  These new regulations are coming with increasing cost while reimbursement options are flat to decreasing (Missouri and Kansas just had Medicaid rate cuts).  The Medicare increase for FY 2018 is 1%.  These new regulations require in some cases, wholesale changes to how SNFs operate when it comes to analyzing staffing needs, resident preferences, food and cultural issues, etc., all concurrent to REDUCTIONS in Medicaid rates.

So, to the point of this piece and the question that bears: What needs to change with respect to Medicaid to abate the problems present?  Secondarily, is there a survival/revival scenario for Genesis, Signature, HCR, et.al.?  I’ll answer the second question first as the first, is harder to sort through.

  • The business model of Genesis, Signature, etc. today is misaligned to the industry revenue/payer and market incentives.  There simply is no quick fix to repurpose the assets and to change the quality ratings and payer-mix, to make many of the facilities viable.
  • Their fixed costs are too high in terms of rent payments.  The REITs have a valuation problem as their books hold an asset today at a value that is by all definitions, impaired.  The valuation is based on cash flow which simply, in terms of rent payments, is no longer attainable.  Think about it: Rent coverage levels below 1 aren’t sufficient today to keep payments current.   A few articles back on this site, I wrote a piece regarding “Stranded Assets”.  This covers these concepts in-depth: http://wp.me/ptUlY-ms
  • Supply exceeds demand in many markets in terms of bed capacity.  Current SNF occupancy runs in the 85 to 88% range in most markets.  This today, is net of beds removed from service in many states to avoid paying (additional) bed tax or getting hit with Medicaid rate reductions and a loss of bed-hold payments for failure to meet occupancy levels (typically 90 plus percent).

The answer: Survival as is not likely and the industry needs to re-base again in terms of valuations, operators and capacity.  The underlying forces that took us to this current paradigm will not shift soon enough or demonstrably favorable (revenue/income), to alter the course for these providers.  I offer that this period is analogous in the incentive changes to the arrival of PPS for the industry in the early 90s.  Rebasing occurred as cost-rate payments disappeared and the rewards tied to “spending” more changed.  During this time, seven of the top 10 SNF organizations went bankrupt, some never to return to publicly traded status.

Turning to the 800 pound gorilla or Medicaid.  Medicaid reform is a significant challenge and without something changing from its present course for SNFs, the fortune for the SNF industry and this payer source is below bleak or grim.  For Medicaid as a payer, SNF care is a small portion of the overall outlay and actually shrinking as other programmatic expansions have consumed growing amounts of resources (Medicaid expansion).  The program drivers are primary physician and hospital care. The primary users of Medicaid today are working poor and their ranks are growing – rural and urban.   As applicable to seniors, Medicaid-waiver benefits have expanded at a far greater rate than SNF care utilization (which has continued to decrease).  Waiver programs, popular for keeping seniors out of institutional settings, have expanded as the needs of an aging society have expanded.

Medicaid is funded principally, by States attaining various levels of revenue, allocating the same toward a Federal funding approach that matches the revenue, and then forwards the Federal share to the state.  As the Feds choose to incent certain Medicaid programmatic initiatives, the Feds may sweeten the pot with enhanced matching dollars or a full (initial ) funding approach such as under Medicaid Expansion.  The flaw in any of these approaches is the temporary nature of the Federal cash subsidy and the limitations imposed to the State that prohibit the State from cutting the outlays conditioned on the Federal incentive.  In other words, the Vegas slot machine effect (just enough payoff to keep you seated and pumping-in dollars anticipating a bigger payoff).  States get hooked and the resort they have to curtailing or balancing their piece of the Medicaid pie (once the Federal piece shrinks) are raising revenue (typically very tough through income taxes hence the bed tax games, tobacco tax games, and the inter-fund related robbery that goes on state to state among schools, highways, gasoline taxes, casino funds, etc.) or cutting provider payments.  It is the latter that has hurt the SNF industry by reference, in this article.

Medicaid in its current form is a broken system and one that was bastardized to break with the ACA.  Expansion hastened its demise, though it was on life support when the ACA was passed and implemented.  It has become a catch-all basket of anything entitlement, non-Medicare and as a result, it is a mess.  The sad reality is every policy analyst with any cred knows it as does all of the House, the Senate, and everyone at DHHS.  The difficulty is how does something like this get fixed.  The prevailing answer: Punt it back to the states and give them flexibility to “innovate” otherwise known as, the Block Grant approach.  Instead, as I conclude this piece with others sure to follow, consider the following.

  • For an SNF, Medicaid is a rate drag – a loser producing daily revenue shortfalls to cost.  It’s not that the rate may be inadequate its that the costs are too high.  The point here is that without wholesale federal regulatory relief from rules and requirements that haven’t shown any evidence of producing better care outcomes, their is no opportunity to reform Medicaid as a payer adequate enough in rate, for a SNF to survive with a majority Medicaid census.  Simple economics apply: Either rate rises to offset cost increases or costs decrease to allow rate to be adequate to produce and sustain, product quality.  The gap between regulatory increases and overreach and rate inadequacy (Medicaid and to a lesser extent, Medicare) is widening.
  • Block grants won’t work as the whole pie is the reference point rather than the programmatic pieces.  Trust me, the parts of Medicaid have considerably different contextual differences and economic and social drivers.  Funding must be de-aggregated and reimagined at the different levels, separately.  The needs of children, families, etc. are so markedly different from the SNF and waiver needs of the elderly as are the economic and social drivers.  Market strategies can and likely will work with the younger groups whereas the elderly, need a social construct (ala Pace approach) model to achieve investment and outcome balance.
  • The benefits need review and re-think.  This is true however, of all federal entitlements.  Here, states given latitude may have some significant advantage in revamping Medicaid.  The Feds, in a Block Grant approach must be the “bank” or the “capital” not also the architect, general contractor, and job-site superintendent.
  • The Medicaid incentives need reversing and a growing emphasis on private initiatives and insurance needs to occur.  The Feds can play an active role by creating avenues for private investment for retirement, accumulation of capital, use of estate and wealth transfer resources, etc. such that over time, the obligations of government to fund large pieces of the social fabric and needs of old age care, shift more in-balance, to each citizen.  The return on investment of tax advantaged, flexible investing for private insurance, private wealth accumulation used for care and service needs after 65, etc. is far greater (positive) than the loss of or revenue offset of the tax advantage.  We know this to be true via HSAs and 401(k)s and IRAs.
  • Finally, reforming health care will reform (significant step forward) Medicaid and the drivers of cost.  Fixing Medicaid is not a stand-alone issue, so to speak.  The challenge in the U.S. today is to REFORM health care, not reform how it is paid for or who has coverage and how does one access the same.  Spending on health care in the U.S. is disproportionately higher than all other world nations and our return in terms of life expectancy and QUALYs, substandard.  We are investing a $1 and losing 20 or so cents on our investment.  We need to focus on “bending the cost-curve” and not the insurance and welfare/entitlement pieces.  Regulatory reform and streamlining payment and program participation would be a great, simple first-step.

 

 

September 14, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

The SNF 800 lb. Gorilla – Medicaid

There is an old joke/riddle that goes like this: “Where does an 800 lb. gorilla sit? Answer: Anywhere it wants to”. For SNFs and REITs today, that gorilla is Medicaid.  Sure, there are numerous industry headwinds that SNFs face in terms of financial performance;

  • Rising percentage of Medicare Advantage patients as part of the payer mix with implied discounts to fee-for-service of 10% or more.
  • Additional regulatory costs stemming primarily from the new Conditions of Participation, released in 2016.
  • Value-based purchasing.
  • Five Star system savvy referral managers that are steering volumes to certain providers
  • Rising labor costs, primarily at the lower end of the labor pool (CNA, food service, housekeepers, etc.) representing the 50th or more percentile of the SNF labor budget
  • Bundled payments in certain markets
  • Growing diversion of former non-complicated orthopedic patients away from IRFs and SNFs to home health and outpatient

Yet is spite of this list, not one or even a combination is as crippling as the impact of a high percentage of Medicaid patients within an SNF payer mix.

Take Genesis for example.  Genesis stock trades at just above $1.00 per share.  Genesis’ average payer-mix across its SNFs is 73% Medicaid.  This means that 27% of  the remaining payers must make-up for a negative break-even margin rate of no less than 30% for each Medicaid patient.  In some states, the disparity is greater.  In other states, the disparity might be less but the state budget woes delay payments or issue IOUs (Illinois) causing the SNF to finance its own below-cost receivables.  Recent news that Genesis may be the next significant REIT holding default is far from fantasy.

The seemingly large, formerly well-capitalized SNF chains are in peril.  HCR ManorCare is in default to HCP (its primary REIT) to the extent that HCP is seeking receivership for the HCR holdings.  The portfolio has a rent coverage ratio of .76x at the facility level and less than 1x globally.  Signature is in the same boat.  Both have compliance problems with Signature having so scarce a margin that it cannot adequately staff or provide for residents in certain locations such as Memphis (facility denied payment, residents relocated).  HCR faces federal Medicare fraud action(s) that will likely lead to settlement payments, etc. for over-billing in excess of $100 million.

Among these troubled SNF providers, one common thread persists – high average Medicaid census (above 66%) as the primary payer mix in their buildings.  With this high mix of Medicaid patients comes staggering facility level losses or revenue shortfalls that must be made-up by other payers.  Consider Wisconsin as an example.  Wisconsin is a state that maintains a balanced budget and generally, a surplus.  It has no issues paying its bills so SNFs do receive timely payment.  Wisconsin however, grossly underpays its SNFs for their Medicaid residents to the tune of an average of a daily loss of $60 per day in 2013.  Between 2013 and 2015, Wisconsin provided no Medicaid rate increase.  All tolled, Wisconsin facilities experienced a Medicaid loss in this period exceeding $300 million.  This gap is exceeded only by the states of New York and New Jersey.  In Wisconsin, the Medicaid loss for an average SNF patient is made up (if possible) by other payers.  That amount today is well over $100 per day, excluding the cost of an imputed bed tax.  As the average Medicaid census is 65%, 35% of all other payers must pay $100 more to cover the Medicaid loss, before any other margin is applied.

Doing the math: A 100 bed facility with 100 residents has 65 covered by Medicaid. The State pays $175 per day for each Medicaid resident, on average.  The Facility costs are $60 per day higher or $235 per day.  In total, the Medicaid loss per month then is $60 x 65 x 30 (30 day month) or $117,000.  To break-even for the month, the remaining 35 patients must pay $346.43 per day or $235 per day in facility costs plus and additional $111.43 per day to recoup the loss from the Medicaid census. This of course does not include any additional costs related to a bed tax or account for any margin.

While the example is illustrative, it is not an atypical story state to state, save the unique twists that are part of every state program.  For example, Kansas chose to convert its Medicaid program to a “managed” program (in 2014) believing it could run more efficiently, save dollars on administrative costs and still provide adequate reimbursement.  As most states, Kansas chose to “bid” its program to various third-party administrators (insurers such as United Healthcare).  Unlike most states, Kansas chose to convert its entire Medicaid program rather than take a phased-in approach.  For SNFs, this approach has been a disaster.  The bulk of Kansas Medicaid recipients are rural.  Enrollment has been a nightmare and qualification of eligibility even more so. None of the participating administrators were prepared and had systems in-place to qualify promptly, newly eligible residents.  The net is many SNFs face technical payment delays due to having to manage multiple payers plus, difficulty in getting approval for residents that are Medicaid “pending”.  Receivables in total and days in receivable have skyrocketed and the state has yet to make many facilities current or whole.  And, because rate is an issue as is the state budget, the bed tax was increased by $800 per bed, per year.  In doing so, any facility with less than a 50% Medicaid census loses money on the bed tax (additional rate generated by Medicaid less than the bed tax increase).

Where this issue resolves is not apparent.  Proposals from Congress to block grant Medicaid to the states almost universally conclude with Medicaid rate reductions for SNFs.  For some states such as Kansas and Missouri, the outlook is a nominal reduction of 2 to 3% (though this is hardly nominal for the SNFs) in Medicaid spending/support.  The reason?  Rates and program expenditures are meager and lean to begin with.  In Colorado and New Jersey, overall Medicaid spending would reduce by as much as 20% translating to a crippling rate reduction without any additional state support (added state funding).  Both states were Medicaid expansion states under the ACA.

As for the survival and fortune of the SNF industry, the outlook for certain segments and providers is rather bleak.  The Medicaid story does not come with additional dollars for rate support or spending – just the opposite.  While block grants may give states renewed opportunities for innovation, the costs that drive SNF spending are not within the purview of a state to change – namely regulation, capital and staff.  The greatest flexibility a state may have is to infuse additional dollars and spending into SNF diversion programs – namely Home and Community Based Services.  These programs are wonderful for certain levels of care needs but for those frail seniors that typify the long-term resident in a SNF today, they offer no hope or savings.  Like it or not, SNF care for some is very cost-effective and necessary due to the needs of the resident (multiple chronic health problems, lack of family and social supports, mental/cognitive impairments, etc.).

In a recent call with an investment analyst from a private equity group, I was asked if “all was lost” for the sector.  The answer I gave is “no” but for some, the ship is definitely taking on water and it may be too late to avoid sinking.  This is definitely true for HCR ManorCare and perhaps for Genesis.  The question today is the collateral damage that may inure to REITs and other investors.  In brief;

  • Facilities with Medicaid census in excess of 50% will find it exceptionally difficult to generate enough revenue via other sources to cover the Medicaid losses.  Medicare simply is not sufficient in patient volume or rate to offset the losses.
  • Reducing Medicaid occupancy is difficult and not quick.  States do not provide a clear-path for this process and federal regulations don’t allow facilities to simply shed residents because of inadequate payments.
  • Many of the facilities with large (proportionate) Medicaid census are older and typified by bed counts above 75, semi-private rooms, and to a large degree, deferred cosmetic and maintenance issues.  In short: they are below the current market expectation for a paying SNF customer.
  • Taking over the operations or acquiring a number of these facilities with high Medicaid census, doesn’t change the fortunes of the same, directly or quickly.  While fixed costs in the form of rent payments may reduce, the operational headwinds remain the same.  A new operator cannot simply transfer out, Medicaid patients.  Even with a bed reduction plan approved by the State, the SNF is responsible for each resident, relocation, etc.  This process if not fluid or inexpensive.  Changing payer mix is difficult, slow and while occurring, expensive.  Frankly, I have never seen the same done to a facility that was predominantly, Medicaid.
  • The market for these facilities is minimal at best. For REITs, expect valuation changes (negative) as the holding value current is based on acquisition cost and income valuation tied to higher rent multiples.  Clearly, with rent coverage levels below 1, re-basing and re-balancing is next (if not already starting).

August 21, 2017 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , | 4 Comments