Among the improvement laggards in the current slow economic recovery was the real estate sector of the economy. Despite record low borrowing rates, home sales seemed stuck in neutral even as positive GDP growth resumed, modest gains in employment occurred, and consumer confidence improved.
Starting late summer 2012 and accelerating in to 2013, the real estate economy has strengthened and improved nicely. Historically, a healthy real estate economy correlates to strong seniors housing starts, sales and occupancy. With many major markets over-supplied as of late in terms of seniors housing units (demand perspective), an improving real estate economy, if trends hold true, imparts hope for the seniors housing sector – or does it?
Seniors housing, as I have written before, has a very price elastic demand curve. Essentially, this means that potential buyers and the universe thereof, is directly influenced by the cost of the housing option. Even when costs remain stable, the demand equation changes dramatically if the buyer for the units experiences change (real or perceived) in his/her economic capacity. Negative changes such as falling real estate prices, constrained ability to liquidate real estate, or reduction in the number of potential buyers for the real estate contribute directly to a senior’s ability and willingness to purchase a seniors housing option. The most dramatic impacts occur within projects that are above-market priced or higher-end as the elasticity of demand for the most expensive options is greatest. In effect, the higher the price the more the consumer of the product or service, will shift to lower cost alternatives, if his/her ability or capacity to purchase has changed (again, real or perceived).
What is most interesting about the real estate economy compared to other economic sectors is that national trends don’t play-out directly, in regional or local markets. Take for example, markets or regions where oil and natural gas production has exploded. Even during the slowest, most depressed times for the real estate economy nationally, the real estate sector in these regions and locales was booming. Housing of any form in areas such as Casper, Wyoming and Williston, North Dakota was (and remains) scarce, pricy, and by timing (supply and demand), development scarce. Conversely, some markets fared far worse than national trends in terms of foreclosures, time on the market and price deflation (Las Vegas and Chicago, IL are examples). Given the regional drivers that impact the real estate economy, recovery will vary dramatically.
Correlating a recovering real estate economy to an improving seniors housing sales and occupancy cycle is simplistic from a global perspective but at the site-specific end, a bit more daunting. What we know generally is that a more fluid, stable real estate market generally improves the occupancy, unit absorption and sales results for seniors housing. We also know that in general, by occupancy and ultimately, price inflation, it improves the operating results of seniors housing projects. What we don’t yet know is whether this recovery is a harbinger of longer-term real estate stability and does the improvement tide wash over all markets at some point and in what time frame.
Arguably, this recovery is perhaps different, certainly less uniform and due to other over-arching economic issues, more complex than any post recession period prior. In certain markets, those that were the least impacted by too much existing supply, rapid increases in unemployment and a large number of foreclosures (REO or REJ properties), recovery is impactful for seniors housing projects, especially if the unit supply is normative or about par with pre-recession demand. In other markets where prices fell dramatically, foreclosures were heavy and unemployment greater than national average, recovery will be slow. Even the latest positive economic news regarding the real estate economy is a tad misleading. Yes, most markets are improving. Yes inventory is down, days on the market is improving, listing prices are recovering, etc. (a few markets such as Columbus, OH, Philadelphia, PA and Spokane, WA continue to see price deflation) but the improvements are from a very, low point. In short, the improvements are signs of “recovery” not a validation of stability – yet.
While the road ahead appears somewhat smoother, the opportunity for pot-holes exists and thus, the relationship between real estate fortune and seniors housing is still rocky. My considerations worth noting are as follows.
- Employment and wage growth (personal income) is still stubbornly slow. Under-employment at record highs.
- In some markets, employment and under-employment will never return to post-recession levels. Certain jobs and companies are gone from the landscape for good.
- Interest rates today are less of a function of improving sales even though low rates improve affordability and thus, general increases in eligible buyers. Changes to federal lending laws and mortgage requirements have tightened credit requirements for borrowers. These changes, regardless of how low rates remain or go, preclude a large universe of individuals from securing favorable term mortgages. In short, the supply of buyers has shrunk and permanently so.
- Given how low rates have been and for how long, rate rise to a certain degree is forthcoming. Rising rates inversely impacts the supply of buyers (negatively).
- Price increases for individual homes won’t broach pre-recession levels (actual or inflation adjusted) for years in many markets. In certain markets such as the Metro Chicago region, price increases in terms of realized sales, are years out to achieve pre-recession par.
- The overall economy is still vulnerable and the consumer, still leery of what can lie ahead. Confidence is better but not great. Consumer confidence is critical to a buyer’s willingness to leverage long-term, arguably as critical as financial capability to buy.
- Seniors housing costs are at their low-ebb as expressed by monthly rental and in some communities, entry fees. While costs continue to rise, albeit not dramatically, the pressure to begin to inflate fees is present for many projects. Fee inflation during a recovery period or stabilization period is anathema to improving unit sales and developing new prospects. With the elasticity of the product, rising rates in a market that still isn’t healed can “chill” prospective buyers.
Is the trend improving for seniors housing? Yes but not universally and the real estate economy in many regions remains disconnected. Additionally, I think the direct correlation between a strong real estate economy and the prospect for seniors housing sales has changed. Yes it remains a major factor but property sales cycles will remain slower than prior periods, prices lower than prior periods, and buyers for individual homes, in lower numbers than in prior periods. The take-away is this: The improving real estate economy is good news, not necessarily great news or for that matter, a sign of salvation for projects looking to ramp-up sales with urgency. The trend is improving but full improvement, is still down the road and for certain, the road is different in direction than before.
In spite of best intentions, wicked winter weather across the middle U.S. has kept me off-track a bit and thus, I haven’t quite met my goal of having these all published by Valentine’s Day. Below is my and my firm’s consensus Outlook on the Home Health industry for calendar year 2013 (part FY 2014).
Summary Comments: While we are bullish on organic patient volume growth, we are tepid on earnings growth for most providers. The primary reason? A continued federal onslaught to reduce and rebase, Medicare payments to providers. Where we are bullish for the future is the prospect for industry growth in “new” payment models; namely ACOs and Bundled payments. The trick with these new payment models is for the industry to fine-tune its role, its operations, and its ability to manage a more risky patient profile than found in the traditional, downstream fee-for-service environment of current. The very nature of the new payment models is to shift or transfer certain risks to lower cost providers. In this role, the post-acute industry and Home Health specifically, will find that managing a more complex patient is required while doing so efficiently and economically is the overarching requirement for success.
In the interim period as the industry is finding new footing in the ACO/bundled payment environment, revenue crunch will continue. Medpac is recommending continuing rate reductions principally via rebasing the Home Health PPS and eliminating the market basket adjustment. Muddying this approach a bit is the loom of Sequestration cuts. Additionally, states continue to struggle with Medicaid. In October and in briefs of support on behalf of California to reduce provider payments, CMS and the Obama Administration argued in favor of a state’s rights to reduce provider payments. While California is an outlier in terms of state fiscal health, the resulting support from CMS implies wide latitude will be given to states in terms of structuring payments if in fact, the states can provide supporting evidence that access will not be compromised. Our quick assumption is that most provider segments demonstrate enough overall capacity that states will win the argument that rate reductions won’t adversely impact patient access.
Medicare : Thanks to prior decade payment machinations set-up by Congress to address a perceived access issue to patients requiring more therapy, the industry has since felt a backlash of negative activism with regard to Medicare and perceived (and in some cases real) overpayments for care. As convoluted as this sounds, the crux is that Congress incented certain behaviors, providers took advantage of the incentives and all of sudden, Congress rises again and screams “fraud”. Coincidentally, the FRAUD cry came when margins for providers crept near 20% on their Medicare book of business. Suffice to say, we didn’t see anywhere near the fraud alleged moreover, providers properly taking advantage of an imbalanced payment system. The whole story here reminds us a favorite children’s book: “If you give a Moose a Muffin….”.
Medicare spending on Home Health approximates $19 billion. Per Medpac, margins in 2013 on average, should be 11.8%, down from 14.8% in 2011. The change is entirely due to rate cuts and market basket adjustments. Effectively, CMS has been imputing rate reductions for what it believes are agency inappropriate case-mix reporting and utilization. The ultimate challenge facing the industry is rebasing: A rebalancing of sorts, adjusting payments across the 153 HHRGs to more accurately reflect (CMS language) provider costs of providing care and desired outcomes of care as measured by OASIS – the industry clinical and functional assessment tool.
If we follow the Medpac/ACA pathway and assume CMS and Congress stays the course similarly, what we see is as follows.
- Rebasing in 2014 -2016: The ACA directs the Secretary to accomplish this task with no more than a 3.5% reduction in payments in any one year equalling a cumulative impact (reduction) of 14% by 2016.
- In 2015 and all following years, market-basket adjustments are offset by a productivity factor.
- Net one and two above for the actual rate impact – a positive market-basket minus the productivity factor still positive, reduces the rate cut impact, etc.
Medicaid: Coverage under Medicaid for Home Health varies widely state to state. States that have adopted and aggressively expanded Home and Community Based Services programs offer more expansive coverage than states that have not. The trend we are seeing literally state to state is a global re-think of HCBS coverage and payments. HCBS has grown in popularity and states are finding that while attractive, the programs are fraught with adverse selection risk (way more beneficiaries in queue than the states believed or desired and spending levels higher than forecasted).
Under Medicaid, each state is only required to offer coverage for Home Health to individuals receiving federal income assistance (Social Security and AFDC) as well as individuals who meet specific need categories such as the blind, disabled, etc. States may expand upon the eligibility criteria but are not “required” to under federal law.
We have seen most states widely expand eligibility, principally as a means of forestalling institutionalization. Most of this expansion occurred pre 2008 or pre financial collapse. Today, states are re-considering the impact of expansion and many, like California are seeking injunctive relief from CMS. What we don’t know as of yet is how Home Health, Medicaid and Medicaid expansion all fit together. We think most states will approve Medicaid expansion hoping that the influx of federal dollars will abate the need to cut programs and payments, some no doubt negatively impacting the Home Health industry. From our view, it is entirely a per state guessing game as each state has different fiscal challenges and different levels of Medicaid enrollment. Thus, we also believe each state will de facto ration any new dollars from the federal government into Medicaid programs that the state believes are a priority. In short, our consensus outlook on Medicaid for Home Health is flat as we are taking a wait and see approach. We are confident however, that HCBS programs will not significantly grow and in most states, will continue to contract in terms of payment and enrollment (states capping program enrollment).
A final Medicaid comment concerns the number of states aggressively moving toward “managed” Medicaid. While early in this transition, this movement may prove fruitful for Home Health agencies if they can plow the dual eligible ground and show high quality and lower overall spending. Managed Medicaid exists, in theory, to help states constrain program growth via redirecting utilization and redirecting payments. High quality, lower cost services are favored and thus, Home Health agencies properly aligned may do well in this environment. Careful negotiation and skilled care management of patients between provider segments is required to profit and achieve tangible volume.
Other/Miscellaneous: In 2012, the OIG/CMS released a report regarding inappropriate billing activities among certain Home Health agencies. The report indicated that within certain geographies and among certain agencies, across 6 measures of questionable billing practices, the OIG noted that one in four agencies exceeded the threshold in at least one of the 6 measures used, thus indicating possible billing abnormalities. The states with the most suspect agencies with billing anomalies are Texas, Florida, California and Michigan.
In the 2013 OIG workplan, focus is provided for the HHA face-to-face requirement. In a 2012 report, OIG found that only 30% of beneficiaries received an actual face-to-face encounter with the physician that ordered their care. Additional focus is provided on agency screening tasks required to eliminate employment of individuals with precluded criminal history. Finally of note, the OIG will focus on OASIS submissions from providers. Specially, the OIG is looking to make sure providers are submitting their required assessments plus including proper billing codes matching the assessment data.
Full of turkey and the trimmings and avoiding any retail outlets, Black Friday seems perfect for a quick synopsis of what is happening with health policy. Fortunately, I’ve maintained a good inventory of “stuff” (not stuffing, though I have an inventory of that too) to cull for content.
- OIG on SNF Payments: This falls into my “news but not really news” category; another report from the DHHS OIG on Medicare overpayments to providers. I have the full report for anyone who would like a copy – just e-mail me (e-mail can be found on the Author page) or comment to this post with a contact. Essentially, what this report indicates is that in spite of repeat changes to the RUGs PPS system and changes primarily to the therapy sections thereto, providers continue to overbill Medicare unnecessarily. The begging question is whether the overpayments depicted are a function of fraudulent activity (intent) or negligence and misunderstanding of proper billing requirements. As I work with SNF providers regularly, I’ll state that elements of both are at play. As I have written before, the system is inherently flawed and thus the incentives align to contribute (greatly) to fraudulent claims. As intensive therapy services calculated by minutes provided are rewarded at significantly higher rate levels, providers seeking to gain (this is what providers do) additional revenues and cash flow, migrate toward care services and patient mix as determined by assessment and coding, that pays the most. The intentionality of certain, possibly fraudulent behavior, arises when “upcoding” and a gap between coding for care level and actual service level, is evident. Per OIG, upcoding accounts for the bulk of the erroneous claims. Thus, in the majority of specious claims, SNFs identified the resident as requiring more therapy than actually provided and documented. As a result of OIG’s analysis of the SNF billing practices, they make the following recommendations.
- Increase and expand the amount of SNF claims reviewed.
- Use CMS’ fraud prevention tools to identify SNFs that consistently bill higher RUG categories and/or have a disproportionately higher level of certain therapy RUGs than regional or national averages.
- Monitor compliance with new therapy assessment criteria.
- Change methodology for determining how much therapy is required by a resident.
- Change to improve accuracy, certain MDS sections/items.
- Follow-up with SNFs that have improperly billed claims.
My comments on this report and “what happens next” are simple. First, SNFs need to heighten their own internal controls and increase their billing knowledge. All too often I talk with administrators ecstatic about their case-mix and their per diem. When I ask these same folks when was the last time they looked at their experience compared to regional levels or national levels, I get too often, the “deer in the headlights” stare. Bottom-line: Audit and benchmark. No single facility should have such disproportionate claim experience and if so, should have a very solid business case as to why, backed by third-party audits that substantiate the difference.
The CMS OIG workplan on SNF overpayments is titled, “Operation Vacuum Cleaner”. Interesting? Not so much. They know this is a huge issue and with the various fiscal issues on the table concerning health policy, a strong vigilance on Medicare overpayments is operative. I have the 2012 OIG Workplan and again, for anyone interested, contact me for a copy.
Where this report leads is to a complete revamp/overhaul of the Medicare payment system for SNFs. In the interim, additional rate rebasing is certain to occur as are heighten assessment requirements and again, more changes to the RUG levels and MDS.
- Fiscal Cliff: A ton of issues are wrapped in the Fiscal Cliff negotiations and among some the most “sticky” are health policy related. Republicans are thought willing to concede on certain tax increase components but in return, are requiring a new look at Obama Care provisions and entitlement spending. Wrapped front-and-center in the Fiscal Cliff debate is the targeted expiration of the current “doc-fix” patch. Without a settlement, the present patch which temporarily derailed required cuts set by the Sustainable Growth Formula (roughly 26%) kick-in January 1. On Wednesday, the CBO issued their opinion on the cost of a one-year fix; $25 million. This number is $7 million higher than an earlier CBO forecast. The fix would forestall the cuts and restore current-level funding for one year. Important to note here is that Part B therapy rates are also tied fo the Sustainable Growth Formula and subject to the same levels of cuts.
This is the classic example of how interwoven health policy and entitlement spending is when viewed against issues focused on overall government spending, deficits and taxation. The real issue here is that the SGR formula is flawed and requires a longterm solution although the same will cost substantially more dollars than any Congress is willing to deal with. What we know is that physicians are already nervous about Obama Care and particularly, the Medicaid expansion components. Cuts to Medicare payments, already viewed by physicians as less than adequate, will only narrow the supply of principally primary care MDs willing to care for any government payer source.
- Shortage of Primary Care Doctors: In light of the last point, on Wednesday the Annals fo Family Medicine published a report that by 2025, the U.S. will require and additional 52,000 primary care physicians to meet population demands. The cause for the increase need per the report is an expanding and aging population coupled with changes in health policy.
This number is interesting but I think a bit misleading. The two major sub-components that need analysis are the need for “geriatric” trained physicians and the number of physicians needed to care for a patient population with a government payer source. I hear too often from the physician community, a strong desire to de-aggregate their practices from Medicaid and Medicare patients, principally due to meager reimbursement and increased regulation. With a major entitlement expansion coming under Medicaid and more states opting to shift administration of their Medicaid plans to manged care insurers, physician participation bears watching.
- 2013: The Year of the Health Plan: I’m already catching a great deal of scuttlebutt about employers seeking to fundamentally alter their present health insurance plans or, drop plans entirely. This comes in tandem with the Obama administration’s release of new rules for health plans and insurers effective in 2013. These rules prohibit insurers from adjusting premiums based on pre-existing conditions or chronic conditions, expand the drugs that must be covered by insurers, specify essential coverage levels on state health exchange plans, and provide flexibility to employers choosing to reward healthy behaviors. As of today, I’ve only glanced at the rules. Suffice to say, and based on what I am already hearing, 2013 will be the year of the health plan and it is already interesting to hear the discussions from trade associations, business groups and employers.
Before too much rancor sets in among readers, I’ll admit that my content has strayed just a bit lately from health policy, etc. to politics and economics. This too shall pass and rather quickly. This post is for a friend and reader who e-mailed me earlier about the ADP job report and what it means for the current political debate regarding the economy. The following is my brief answer.
For those who don’t typically follow economic data, the ADP report is a monthly barometer tied to private, non-farm, non-governmental payroll data. ADP is the largest processor of payroll in the U.S. Their report is the result of accumulating payroll data and arithmetically, modeling the data into employment changes (jobs added, jobs lost). Today’s report indicates that 158,000 private, non-farm, non-governmental jobs were added in October. On first blush, this is a plus as most economists were forecasting less than 100,000 new job adds in the month.
Politically spun, this a plus for Obama and while not a total downer for Romney, a shot across the bow. The report rallied the stock market as expected. Coming less than a week before election Tuesday, the report will either gain momentum based on tomorrow’s BLS report (federal job and employment data from the Bureau of Labor Statistics) or turn idle if the math doesn’t jive. I suspect a high degree of alignment.
To the title of the post and the reply to my friend and reader: The accuracy of the ADP number and the BLS numbers is highly suspect. While their respective releases make prominent news their corrections don’t. Consistently and over time, the corrections are where the real story is. Before anyone, including my friend, “jumps the shark” (a reference to Happy Days and Fonzie) and takes today’s report and tomorrow’s report as indicative of anything, let alone a sign to vote one direction of the other, consider the following.
- Even at 158,000 new jobs for October, the ADP report if accurate only indicates very slow growth. Job losses for the month were still above 350,000. Push and pull at the two with fifth grade math skills and a bit of common sense, this is not a sign of robust growth or even a foot-hold on longer term recovery.
- The ADP report does not cover the “core” of relative job data. For example, we don’t know “what type of jobs” (part-time, full-time, permanent, etc) or at what rate of pay. As is typical at this time of the year, seasonal retail is bulking-up and part-time, low to moderate wage jobs are added. These are not permanent jobs with benefits or for that matter, “game changers” for recovery. Similar to the last BLS report that dropped the unemployment rate, free-lance, part-time, ad hoc and so forth can be counted a variety of ways and reported as employment or jobs.
- ADP has recently changed its calculation methodology to “more accurately reflect” real time changes in employment. Important to note is that ADP’s data is proprietary and only results are shared. A quick glimpse difference in this report is a rather large shift to job growth among large businesses. While I won’t state openly that this is troubling from a validity standard, it is outright curious as to this point and through recent periods, large business job growth has been “zip”. Also somewhat curious to me is the strong results in construction job growth against a decrease in manufacturing. I buy the manufacturing but I question a 23,000 jump in construction if for no other reason than I’d like to see the type of job, especially at this time of year. True, new housing construction is up but commercial is flat and government spending for infrastructure is at low tide.
- Finally, ADP like the BLS data is consistently “wrong” and not just by a little. Post period revisions are common and rarely, especially of late, are the revisions “up”. For example, the BLS data and the ADP data are effectively the same in their raw state yet the difference between the two over recent periods (last three years) annualized to 400,000 jobs; ADP overstatement. The ADP methodology revision I referred to is supposed to correct this gap but as it is new (first month), only time will tell. I am skeptical at best. Under the old estimating method, September’s report was 162,000 new jobs later revised to only 88,000.
Economic data like jobs reports, etc. point-in-time or snapshot reminds me of a phrase used by former British Prime Minister Benjamin Disraeli: “There are three types of lies – lies, damn lies and statistics”. For any of this data to truly become meaningful from a complete economic perspective, it must be consistent over time. Jobs are only a fraction of the issue with the greater weight of type of job, wage, benefits, sector, etc. all required additions. Similarly, new jobs as a sole measure must balance out organic labor growth (new workers), existing unemployment levels at the U6 level (the total number of people unemployed and underemployed including those who have given up looking for a job which today remains precariously close to 15%), and rolling job losses. At 158,000, if accurate, this is approximately a net “gain” of 58,000 jobs as by consensus measures, 100,000 new workers enter the economy monthly. The truest measures are wages/income and percent of total population capable and willing to work, working/employed on a consistent basis. Don’t look for this economic measurement to be truly positive and reflective of a go forward change in momentum prior to next Tuesday or for that matter, any time in the near future.
I have uploaded the Power Point portion of the presentation I did at the recent Leading Age Annual Meeting and Conference in Denver per reader and attendee request. You can find it and download it on the Reports and Other Documents page on this site. The presentation is titled, “Value Propositions and Marketing”. The content essentially covers the application and development of economic value propositions and their resulting use in developing marketing and pricing strategy.
By popular request, I’ve created a new feature to this site to cover issues and topics “in brief” that I am watching or in some cases, directly tangential to by engagement. Weekly, my inbox is awash in “what have you heard?”, “are you seeing this?”, “what’s going on with?”, etc., type questions. I do try to answer them all to the extent possible and then one day, someone asked if I could compile my comments into a weekly or bi-weekly piece and route it or post it accordingly. This is my first compilation of what I think, will occur on an every week to ten-day basis (if I can keep up).
- Supreme Court Decision: Thursday is the day we learn the decision of the Court regarding the future existence of the PPACA; the focal discussion on the individual mandate. My reasoned opinion, obtained in part from my myriad of qualified and unqualified sources is that the Court will find the mandate unconstitutional. Personally, I believe that the Court will also effectively reason that the core of the PPACA then falls, applicable to the exchanges, Medicaid expansion, and the expanded benefit and coverage criteria mandates for commercial/private insurance policies. I am less clear about how the language will be interpreted from a policy perspective but suffice to say, I am solidly in “the camp” of those who believe the PPACA will be shot full of holes on Thursday, left to crumble as it is structurally gutted.
- Post PPACA Demise: Regardless of the ultimate outcome, I am advising providers to look at the core concepts embedded in the PPACA and to quickly understand, the health care landscape has fundamentally changed. Remember, CMS has broad and powerful rule-making capabilities and what once may have been a part of the PPACA can quickly return in elemental form via administrative law. For those who will joyfully celebrate the end of the PPACA, I offer a quick refresher regarding the “law of unintended consequences”. An activist CMS/DHHS can quickly re-visit a number of core concepts and apply the same with perhaps, nuances and twists that are more onerous than applied in the PPACA. Thus, I suggest everyone stay close to a script that focuses on quality based payments, bundled payments, new network and delivery systems (ACOs), re-hospitalizations, new outcome measures, coordinated care, and Medicare payment restructuring and re-basing (the latter necessitated by the poor fiscal outlook for Medicare, PPACA notwithstanding).
- Hospital Observation Stays Rising: Starting October 1, hospitals will receive weighted payment reductions for re-hospitalizations occurring within 30 days post discharge for Medicare patients hospitalized concurrent with one of three DRGs – heart failure, pneumonia or MI/heart attack. Payment reductions will occur for all Medicare payments for hospitals that rank retrospectively, in the bottom quartile of performance on re-admission rates compared to applicable peers. In October 2015, additional at-risk DRGs are added and monitored for re-admissions. The trend that we are seeing today is for hospitals to take a “cautious” approach with Medicare patients presenting via outpatient settings, nursing homes, and through the Emergency Department as applied to admissions. While penalties are not yet in-force, hospitals are mindful of the re-admission implications and are using observation stays as a vehicle to expand care without triggering an inpatient admission and thus, a possible adverse event. I am not yet seeing a diagnosis correlation to these events simply a Medicare implication. The downstream implication is that a hospital discharge to an SNF may not include a three-day qualified “inpatient” stay for Medicare coverage. I hear increasing complaints from SNFs about this issue and I advise the same tactics; get to the hospital in-person to qualify your discharges and do your homework.
- Post Acute Care Transitions: In light of the topic above and the focus on avoidable re-admissions, post-acute providers need to get on-board and quickly. Hospitals are loath to do business with weak post-acute providers that beget re-admissions in 30 days, regardless of the original hospital admission DRG; too much risk. SNFs, home health providers and to a lesser extent, hospices need to focus on tightening their care transition approaches and increase their ability to insulate against unnecessary discharges to the hospital. Increasing internal clinical competence, strengthening physician relations, improving pre-admission assessments, improving staffing particularly on off-shifts and weekends, developing transition algorithms for various disease states and routine discharge causes, and working with families via education are all key components in improving post-acute care transitions.
- Hospice Still under Watch: I am hearing constantly from hospices that are being probed, struggling for referrals and having re-certs denied. Frankly, this isn’t surprising as almost week by week, we learn of another settled Qui Tam case involving False Claims Act violations. The most recent occurred with Hospice Care of Kansas, strikingly similar to others within the industry. The Feds smell blood in the water here and as I have cautioned before, one public Qui Tam action begets others, particularly when large dollars are involved. Whistleblower actions are a new cottage industry within health care and hospice claims are low-hanging fruit. Here’s the take away and for those who haven’t heard me lecture on this subject or read other pieces that I have written on it, this isn’t “news”. Hospice is a niche industry and under Medicare, very oddly regulated with ill-defined eligibility and coverage criteria. The Medicare guidelines are frankly dated and the payment, inversely proportionate by setting and by length of stay. The combination of dated regulations, improperly incentivized payments, and non-diagnosis specific coverage determinations can’t help but create an environment of fraud. Mix Medicare with Medicaid payments that over-arch within nursing homes and certain home/community based settings and effectively, open flame is applied to a combustible liquid. In reality, there are too few organically qualified, terminally ill Medicare patients that desire and elect hospice, compared to the number of Medicare hospice providers. By “organically” I mean patients with classic end-stage diseases or conditions such as cancer, end-stage Parkinson’s, certain categories or stages of heart failure, COPD, etc. In these cases, certainty without treatment and intervention is known. Expanding the eligibility criteria (for providers) under Medicare is fairly easy as diagnostic codes are not required for coverage nor really, is evidence of decline in status though recently via probe activity on recertifications, I have seen situations where CMS has denied continuation of coverage for lack of evidence of terminality (evidenced by condition or status deterioration). Bottom-line: Hospice will remain under scrutiny for quite some time and the net result, a stagnant environment for referrals and new patients will persist. I expect the industry to shrink in total volume or marginally, remain flat over the next three years.
I hope everyone likes this new feature and for regular readers and followers, please feel free to keep your comments and questions flowing. I’ll get to them as best as I can.
A common question I am fielding has to do with the current “no growth” pattern of hospice census; in some cases, decline is more operative of the pattern. Briefly, there are a number of factors at play, some recurring themes and some driven by more aggressive CMS intervention.
- The biggest culprit in the current no-growth situation is the economy. I’ve written about this issue before but it clearly bears repeating. In a down economy, paying patients are more scarce than in a healthy(ier) economy. Assuming as has been the case, provider growth or supply hasn’t declined substantially (if at all) during the recession to current level of stagnation; the same number of providers are chasing a lesser number of “paying” patients. The reality is such that each provider seeks patients that can pay and ranks or grades patient value by payer source; some patients are worth more than others. As hospice is primarily a “down stream” referral, generally coming from an acute environment, the base of referrals starts with the supply of paying patients within the hospital. For most if not all hospitals, patients with good private insurance are the most prized. Medicare comes next and Medicaid next and everything else well below. For hospice, the bulk of referrals are Medicare followed by Medicaid and private insurance to a far lesser degree. When the supply of patients with private insurance declines due to economic malaise for a prolonged period (as current with high unemployment) and the level of elective procedures dies rapidly, all other paying patients become more prized by the hospital; their value increases. As the value of these other patients rises and isn’t replaced quickly with private insureds, the realization of keeping Medicare and Medicaid patients within the system and the hospital as an economic necessity (paying the bills) trumps the value of referring down stream. In short, the demand from a supply of private insureds for beds and services isn’t great enough today to push these other patients out of the acute system. Economically speaking, if I am a hospital, I will maximize whatever revenue source is available to me such that doing so is better than nothing as no immediate alternative or replacement is available.
- While overall census hasn’t grown much over the last few years (if at all), CMS’ concern regarding the composition of hospice census has. The primary focal point is around nursing home patients on hospice and their proclivity as a sub-group to account for longer lengths of stay. Not surprising, as the sources for non-nursing home patients have remained stagnant or declined, hospice activity in nursing homes has steadily increased. What CMS is concerned about today is the growth of the longest stays, principally where these stays occur and what diagnoses correlate to these stays. A notable aside and one that cannot be ignored is the type of hospice ownership that seems to drive the majority of long-length stays. The facts below combined with an OIG workplan emphasis that is focused on reviewing the business relationships between hospices and skilled nursing facilities correlates directly to a softer environment for census gains derived via nursing homes. If the term Hawthorne Effect (behavior modification that occurs as a result of being watched or monitored) comes to mind, I’ve made my point.
- The longest stays occur on average, in nursing homes and assisted living environments.
- The average length of stay in-service for a for-profit hospice is 30 days longer or 33% longer compared to a non-profit hospice.
- The bulk of industry growth in terms of organizations providing hospice has been for-profit, free-standing hospices. The rest of the industry growth has remained essentially flat.
- For-profit margins of free-standing hospices average 10 to 11% compared to non-profit margins of 3%.
- A recent OIG report on hospice care provided in nursing homes found that 82% of the cases reviewed did not meet Medicare coverage requirements.
- In the grand universe of all health care options, hospice care remains a decided niche’. For non-health care people, its tough to wrap your head around a care approach that by its nature, offers no “curative” option. For all too many individual patients and their families, this option is too often viewed as “giving up”.
- Marketing has caused some erosion but marketing on behalf of non-hospice providers. Cancer remains the primary cause of a hospice referral yet for every hospice advertisement I encounter, I encounter a literal ten to one (if not more) advertisements for hospital-based cancer treatment programs or distinct hospitals (think Cancer Treatment Centers of America). While I know the overall survival numbers, costs, logistics, etc. as well as any one, the general patient and their family does not. The treatment approaches are phenomenally positive and reassuring regarding themes of “hope”, “cure”, etc., even for the most desperate of diagnoses. The hospice message is frankly trumped quickly as to the unitiated, it is still about death. The result: Referrals that should have come sooner perhaps are not coming at all or coming closer to the final days.
Taken the above into account and CMS data regarding a projected growth in outlays for FY 2012 of 2.8% (Medicare), an amount that is almost entirely rate driven, expect continued stagnation on the census side. Until the economy improves and more certainty is forward on the future of health care reform, growth in terms of new volume is not soon to arrive.
As known by now, a lot of change is occurring with Medicare effective 10/1. Daily, I field questions from around the country regarding what exactly is happening and what if anything an SNF should do to “minimize” the impact. To a certain extent, at least as far as reimbursement reductions go, it is difficult and ill-advised to adjust too hastily or rapidly. Longer-term planning is required to fundamentally, re-balance a payer mix. This said however, all SNFs should be looking at their business models realizing that the long-term rate outlook on Medicare is best case flat, most probable declining.
Below I’ve accumulated and summarized, my top five recommendations/answers to the most common “what do we do next” questions. For reality purposes, I assume (as it will happen) that rate reductions as called-for in the CMS final PPS rule will occur. I understand that Congress may choose to intercede but given my sense of the current political climate and the economic issues at hand, I think it ill-conceived not to assume reduction and bet on “lobbying” to reinvent higher rates.
- Begin Balancing Your Payer Mix: Out of all of the SNFs I have analyzed recently, those that have a truly balanced payer mix with appropriate revenue sources will fare well to fairly well, even with the pending Medicare cuts. Balanced looks different to different SNFs but in reality, they all share common traits. First, Medicare isn’t their sole source of margin. Second, their Medicare case-mix is well mixed with rehab and clinical qualifiers, perhaps a shade more clinically complex than rehab only. Third, they have strong overall clinical competencies and thus, attract patients with other payer sources such as private insurance. Finally, Medicaid is equal to or less than a third (no more) of their payer mix. To balance an SNF payer mix, the facility/organization must undertake a strategy to define service/product mix, add clinical competency, build referral sources for different patients, and improve overall operating efficiencies aligning staffing and service delivery with effective care outcomes. This strategy is not about optimizing Medicare reimbursement (though it does that), it’s about building a care engine that performs across payer sources.
- Develop a Solid Understanding of Medicare Reimbursement: Many providers I talk with have only a rudimentary understanding of the current PPS system and most of what they have learned comes from the wrong sources; sources that are partial to a particular bent or issue. Even with the cuts, providers who understand how to take advantage of caring for a more clinically complex patient profile and get reimbursed for their work, aren’t horribly at-risk for major revenue swings. They have developed internal core competency in coding, in managing the length of stay, and in capturing the true care needs of the patient. They bring in the necessary training resources and have staff resources that help maximize their productivity and care delivery. They know how the system works, don’t try to deny the changes, and develop the systems and the people necessary to be current, use the MDS effectively and capture the dollars in the form of reimbursement, correctly.
- Analyze the Impact: If reimbursement cuts are forthcoming, and they are, I hear too many vague generalities about how much and “the sky is falling” rhetoric. Frankly, most providers I talk with haven’t modeled the financial impact as of yet and as the old adage goes, “you can’t begin to fix what you don’t know is broken”. In some cases, simple tweaks to operations can improve the actual impact. In other cases, changes to internal delivery systems, coding, etc. can improve the revenue impact (positively). Suffice to say, knowing what the impact is today can help a provider hone in on what options are available to mitigate the “pending” damage.
- Understand the Totality of What is Changing: It is easy to reflect solely on one element of the Medicare equation that is changing in October; revenue or reimbursement. The problem most providers also face is that certain systemic changes are occurring such as the allocation of treatment time for group therapy, the requirements for End of Therapy OMRAs and the Assessment Reference Date windows. As October 1 is 30 days away, providers should have already gotten up-to-speed on these changes and begun implementing policy, procedure and systemic internal changes to address the new requirements. As change requires education, adjustment, audits and then additional education and/or adjustments, starting too late equates to getting claims wrong. Ask any provider that has gone through a probe or had claims rejected what that revenue impact is; far worse and impactful than a rate cut.
- Focus on Therapy: When I encounter SNFs with major Medicare issues, I see three common problematic themes. First, for facilities that use outside therapy or contract therapy providers, the facility has “washed” their hands of the Medicare therapy issues. This is a problem on so many levels. As I have written before, the therapy company is not the provider, the SNF is. Under Part A, the SNF is always the provider and as a result, any problems caused by incorrect billing, improper care, improper coding, etc., perpetuated by a contractor is a problem for the Part A provider. Basically, the liability cannot be ceded to a contractor. The SNF must know as much about the provision of therapy under Part A as it does the provision of nursing care or any other discipline. And most important, while therapy companies claim that they develop partnerships with SNFs, the reality is far from a true partnership. For a partnership to actually occur, the risks and benefits must be equally shared. Such is not the case in these relationships. In this relationship, each (the SNF and the therapy company) have different business and profit motivations such that at times, the interests may compete in ways deleterious to the SNF, left unabated. Second, if a provider has its own program and staff, the therapy component is rarely fully integrated with all other care disciplines. In short, all too often therapy is looked at as purely a profit center rather than an integral part of the clinical care delivery an SNF provides. Therapy involvement, assessment, and integration into the total care plan of all residents/patients prevents problems in terms of care outcomes, helps capture additional revenue via reimbursement, and improves the overall clinical competency of the care team. Third, all too many administrators have no idea the role therapy provides in their Medicare or general care delivery. Suffice to say that if an Administrator wants higher per diems, better care outcomes, better compliance results, its time to learn the overall MDS and understand where therapy integrates in Medicare, how this system works (not just the revenue generated) and how therapy can improve the overall operating performance of an SNF (revenue and expense).
Before I conclude, I have three remaining suggestions to issues that I commonly address in the SNF world. These suggestions are pertinent at all times for an SNF that is seeking to improve its operations, regardless of the reimbursement issues that are “at-play”.
- Develop Centers of Excellence: Trying to be all things to all patient types, etc. in an industry segment as wide as the SNF arena is a recipe for failure or at best, average to below average results (operating and other). Not every SNF will excel in a post-acute, transitional care environment. Markets are different, referral source needs are different, etc. By developing an acute awareness of market needs, referral source needs, etc., an SNF can focus-in and develop, centers or “lines’ of care excellence. Three things happen or should with this approach. First, occupancy issues are less prevalent. The SNF knows its flow of patients and can set aside the right amount of capacity for the length of stay and volume requirements dictated by a group of patients. Second, efficiency in terms of staffing, supplies, programs, care plans, etc. can truly be developed. Third, building a true revenue model is far easier. A revenue model is driven by an expectation of certain occupancy, revenue streams from each patient type, and pricing/reimbursement models that accentuate revenue. Expenses can then be matched accordingly.
- Suppress and Evaporate “Stupid Money”: Stupid money is dollars that are spent on things that can be controlled by an SNF or any business. It saps resources and margin. Common locations of stupid money are Worker’s Comp, agency use, over-time, supply waste, improper coding, fines, forfeitures, billing errors, staff turnover, and compliance/legal issues. Minimizing the dollar flow and/or eliminating it for “stupid money” immediately improves the bottom-line. I don’t know how many dollars over the years I have seen across all of the facilities I have been in that get wasted repeatedly, on stupid money issues.
- Develop Care Systems/Algorithms: SNFs that really excel financially and from a care/outcome perspective, have gotten very good at developing common protocols and algorithms for common admission diagnoses. They have become efficient and effective at delivering high quality, lower cost care by reducing the variances and treatment fluctuations that arise when care is unplanned or uncoordinated. They have developed formularies, treatment protocols, and outcome-based algorithms for the most common types of admissions and issues faced by patients within their settings. Some have gone as far as to coordinate this work within their upstream and downstream referral networks (home health on discharge, hospital on admission/re-admission). These SNFs make solid, repeat margins, have balanced payer mixes and are positioned appropriately for the next foray into healthcare reform; namely bundled payments, competitive bidding, ACOs and quality-based incentive payments.
OK, the title is a bit wordy and trust me, I could have included more “posts” but I think I got the point across. First, I’ll admit to having a crystal ball however, the picture I see is a bit like the first (and only) television set I remember having as a kid: Not in color, lines running vertically and horizontally, snow, and an antenna that required frequent manipulation and tin foil to get any kind of reception. And of course, there were only three channels available. The same today is true about my crystal ball on health policy and what to expect in the post-acute industry.
My crystal ball’s three channels are Medicare, Medicaid and the Economy. Reviewing each, here’s the programming I see for the fall lineup or if you prefer, the period post October 1 (fiscal year 2012) through early next year.
The Economy: The debt ceiling discussion and the actions taken by S&P and the Fed in the last couple of weeks are a reminder via a cold slap, of how mired in dysfunction Washington remains and how moribund the economy truly is. While technically not in a recession, the economy is not really growing either; a growth rate of less than 2% in GDP is like treading water. For unemployment to change, consumers to return and capital to re-enter the business investment side, GDP growth needs to be above 2% and ideally north of 4% for a sustained period. Unfortunately, in order for this to occur, fiscal policy in Washington needs to develop some semblance of coherency and consistency.
What I know from my economics training and background and my last twenty-five years plus in the healthcare industry boils down to some fairly simple concepts. These concepts are I believe, a solid framework for providers to use in terms of planning for the near future and even somewhat beyond.
- The U.S. debt level is fueled to a great degree by entitlement spending, less so by discretionary spending. If the prevailing wind is about debt reduction and balance in the federal budget (or getting closer to balance), two things must occur. First, spending constraint where spending primarily occurs, namely entitlements. Second, revenue increases in some fashion, namely taxes. The devil as we know it today, is how and where on both sides of the ledger (revenue and expenses). Spending reductions alone are insufficient, unless dramatic, to significantly lower the debt level or balance the budget; particularly in a period of near zero economic growth. Dramatic spending reductions are clearly unwise and potentially, deleterious to an industry sector (healthcare) that continues to provide steady employment. Similarly, for spending reductions on entitlements to truly have a positive impact and make sense, program reform must be at the forefront of “why” less spending is needed or warranted. Program reform, ala the health care reform bill which didn’t really reform Medicare or Medicaid but added new layers of entitlements, is far from the answer. For providers, there is no immediate or for that matter, longer-range future that doesn’t entail less spending on Medicare or Medicaid. As the only “trick” in Washington’s bag or the bags contained in the statehouses is rate cuts, anticipate and plan for the same.
- A lackluster, no growth economy with high unemployment levels fuels provider competition wars over paying patients. As fewer paying patients are available and/or fewer “good” paying patients are available, providers will compete for the same market share within and across the industry levels. What this means is that providers will seek to acquire market share within industry segments (home health, hospice, SNF, etc.) and across industry levels (hospitals seeking to maintain patient days versus referring to post-acute providers). The end result is more or similar levels of M&A activity, if capital remains available, and thus, consolidation that is driven primarily by market share motives.
- According to a recent healthcare expenditure outlook released by CMS, healthcare spending is projected to reach $4.6 trillion by the end of the decade, representing nearly 20% of GDP. The primary contributor to this projected level of growth is the Affordable Care Act, principally due to the expansion of Medicaid and the requirements for private insurance coverage (Medicaid growth of 20.3%). While CMS notes that Medicare spending may slow somewhat, this assumption is predicated upon the continuation of spending cuts and a 29.4% reduction in physician payment rates required under the current Sustainable Growth Rate (SGR) formula. Assuming, as has historically occurred, Congress evacuates the cuts called for under the SGR and as has been discussed, moves to a formula tying payment to the Medicare Economic Index, Medicare spending accelerates to a 6.6% growth rate (1.7% projected for 2012 with continuation of the SGR). Summarized, health spending is the two ton gorilla in the room and it will continue to have a heavy, significant influence on economic policy discussions at the federal level and beyond. Though I don’t agree with the recent rating action taken by S&P, it is impossible to ignore the consensus opinions of allof the rating agencies: Entitlement spending, namely driven by healthcare spending, is unsustainable at its present level with the present level of income support (taxation) and as long as the status quo remains fundamentally unchanged, the U.S. economy is not fundamentally stable.
- Current economic realities and the rating agencies actions and statements foreshadow a stormy, near term future for the healthcare industry. As is always the case, there will be winners and losers or more on-point, those more directly impacted and those less so. On the post-acute side, excluding reimbursement impacts, I’ve summarized my views on what I see in terms of economic impacts for the near term (below).
- The credit rating side will remain pessimistic for most of the industry “brick and mortar” providers. Moody’s, Fitch, et.al. will continue to have negative outlooks on CCRCs, SNFs, etc. primarily due to the economic realities of the housing market, investment markets, and reimbursement outlook. Within this group of brick and mortar providers, Assisted Living Facilities will fair the best as they are the least impacted by the housing market and for all intents and purposes, minimally impacted by reimbursement issues (save the providers that choose to play in the HCBS/Medicaid-waiver arena).
- The publicly traded companies (primarily SNFs but home health and LTACHs as well) will continue to see stock price suppression due to the unfavorable outlooks and credit downgrades provided by the rating agencies. This will occur regardless of the favorable earnings posted by some of the companies. Reimbursement trends (down) are the primary driver combined with the hard reality that Medicaid is in serious financial trouble, even more so going forward as enrollment jumps due to continued healthcare reform phase-in schedules.
- Capital market access will continue to be tight to inaccessible for some providers. Reimbursement, negative rating agency outlooks, lending/banking reform, above historic levels of failures/bankruptcies, etc. all continue and will remain as an overhang to the lending environment. Problems with potential continued stable to increasing funding levels at Fannie, HUD, etc. create additional credit negativity and tighter funding flow. Capital access, when available, will continue to have a credit premium attached, in-spite of low base rates. I expect to see continued development and demand for private equity participation.
- Given the above, financially driven mergers and acquisitions will remain somewhat higher as organizations seek to use the M&A arena to create financially stable partnerships and bigger or larger platforms from which to derive credit/capital access.
Medicare: The problems with Medicare are too deep and lengthy to rehash here and thus, I’ll move to brevity. Medicare is, as I have written before, horribly inefficient, bureaucratic, and inadequately funded to remain or be, viable. As a result, only two real scenarios exist today: Cut outlays or increase revenues. Arguably, a third that involves portions of each scenario is the most probable solution. Real reform is light-years away as the current and forseeable political future foretells no scenario that includes a Ryanesque option (Paul Ryan plan from the Republican Congressional Budget and/or Roadmap for America). Viewed in this light, the Medicare outlook for post-acute providers is as follows.
- For SNFs and Home Health Agencies, reimbursement levels are on the decline. The OIG for CMS and MedPac have each weighed-in that providers are being overpaid. Profit margins as a result of Medicare payments or attributable to Medicare, are deemed too high (mid to upper teens) and as such, the prevailing wind is payment or outlay reductions. The bright-side if such exists, and as I have written before, this “cutting” trend will impact some providers far more than others. The providers that have relied heavily and primarily on certain patient types for reimbursement gains will be more negatively impacted than providers with a more “balanced” book – a more diverse clinical case mix. The movement is toward a more balanced level and thus lower level, of reimbursement theoretically closer aligned with the actual clinical care needs of patients. Providers with more diverse revenue streams and more overall case-mix balance will not be as adversely impacted although, the Medicare revenue stream will be lower or less profitable.
- Hospice has remained relatively unharmed, principally due to its lower overall outlay from the program. It remains a less-costly level of care than other institutional alternatives. A note of caution here is important. While rates have not been cut, program reform is occurring on the fringes and I suspect a wholesale re-design of the Medicare Hospice benefit is forthcoming. In such a fashion, payment reform rather than rate reform or reduction will occur. The obvious trend is to restructure payments away from a reward for lengthier stays and to require more precise determinations of terminality, tied to a tighter or imminent expectation of death. OIG and MedPac have issued a number of papers and memos regarding the relationships between Hospice and SNFs that correlate to longer stays for certain diagnoses. Summarized, payment reductions via rate are less of an issue but utilization reform is forthcoming via additional regulation designed to reduce overall payments to Hospices or as CMS would say, to more closely align payments to the real necessity of care for qualified, terminally ill patients. Without question, the largest impact (negative) going forward will be on hospices that have sizable revenue flows tied to nursing home patients.
- LTACHs are in a similar reimbursement boat as hospice; small overall outlay within the program and for the past few years, minimal expenditure growth. The industry is from a cost perspective, fundamentally flat. What will be interesting to watch is whether under certain aspects of healthcare reform, this niche’ takes on a growth spurt. Bundled payments, ACOs (Accountable Care Organizations), and shifts in SNF reimbursement away from higher acuity, rehab patients may lead toward more utilization of the LTACH product. This being said, the prevailing Medicare reimbursement profile is fundamentally flat. Given a bit more creativity on the part of the LTACH provider community, this segment may be poised for some growth, although not directly via increasing payments.
- The most uncertainty lies on the Part B provider side, particularly providers that are reimbursement “connected” to the Physician Fee Schedule (therapy for example). As of today, the required change to the fee schedule as a result of the Sustainable Growth Rate formula is a fee cut of 29.4%. It is quite possible, due to the current negative or flat growth trajectory of the economy, and sans any change in the law, for fees to be cut again in 2013, barring Congressional action. Most acutely impacted in this scenario are physicians and predominantly, primary care physicians. I have yet to see a Congress that fails to intercede and repair cuts this draconian but the political times and the budget deficit debates are markedly different than during any prior period. Critical to whether this cut or some level less than this is implemented is the issue of access, already a hot topic for physicians. Physicians, particularly primary care specialists, are already in short-supply nationally, woefully short in certain markets. If cuts of this magnitude or perhaps any magnitude roll forward, I suspect many physicians will curtail or close their practice to new Medicare patients. On the other side represented by non-physician providers, Part B cuts of this magnitude will no doubt limit service and access. Fixing the formula and the law has been difficult for Congress as the dollar implications are substantial. I foresee another round of patches, etc., occurring close to the “cut” date, especially since 2012 is an election year.
Medicaid: For as many reasons as Medicare is a mess, Medicaid is as well, though magnified by a factor of two or more. Medicaid’s biggest problem now is rapid growing enrollment, primarily due to high unemployment and upcoming federal eligibility changes mandated via the Accountable Care Act (healthcare reform). Given Medicaid’s current funding structure, this issue poses huge problems in flat to negative growth economies. States simply due not have the revenue to create a higher matching threshold or level, necessary to achieve more federal dollars. In July, the enhanced federal match provided via the Recovery Act (stimulus) sunsetted leaving states with huge structural deficits and the prospect of deficit growth due to increasing enrollment. In virtually every state, rate cuts have been discussed and in half-again as many, implemented. States continue to move to the federal government seeking relief from required or imputed service provision requirements and/or relief from eligibility requirements (waivers). The inherent difficulty with balancing Medicaid funding is that the same is directly tied to stable to growing state revenues and a clear picture of population risk or need. Changing (increasing) populations often present adverse-risk scenarios, creating higher than normative utilization. For obvious reasons, lower than market reimbursement levels, access is a big issue. Not all providers willingly and openly desire Medicaid patients and those that do are not on the increase. Without additional funding assistance at a level beyond what is called for in the Accountable Care Act, regulatory relief and an improving economy, the reimbursement prospects under Medicaid are all bleak.
- In the post-acute environment, the biggest impact of this continued ugly Medicaid scenario will fall directly on SNFs. Matching prospective or real Medicaid cuts with Medicare cuts forthcoming is a true “negative” Perfect Storm. For most SNFs, Medicaid is the largest payer source and until recent, Medicare was used as a make-up funding source for Medicaid reimbursement shortfalls. Adding fuel to an already smoldering fire, the suppressed earnings available to seniors, no growth in Social Security payments, and a stock market that presently produces only a flat return trajectory limits the pool of private paying and privately insured patients. In short, there is no additional room on the revenue side to make-up an SNFs Medicaid losses. For SNFs, only the few that have limited leverage, high occupancy, an extremely balanced payer mix, and stable staffing will weather the Medicaid near term future; a future of no rate increases or likely cuts.
- While not a huge segment of the post-acute environment, HCBs providers will feel the Medicaid pinch as well. As a result of needing to reign in Medicaid spending, states are rapidly curtailing their funding and payment levels for HCBs programs. While most states still claim that HCBs expansion would help soften their Medicaid deficit, states that bit a big bullet in this arena early on (California for one), now realize that waiver programs produce massive new levels of beneficiaries who want and need access to community support services. SNF access was already somewhat limited as the industry has truly shrunk but the demand for services in this growing eligibility pool has expanded. Funding these services is becoming a real problem for states and as such, support payments will remain flat, decline and program growth will be capped.
- Home Health will also feel a bite from declining Medicaid funding although its Medicaid utilization levels are modest at best. For Home Health, Medicare is the big dog and Medicaid a minor element. Staffing costs are on the rise for Home Health as the competition for home health aides in many markets is brutal or getting rough. Competition, even in a high unemployment environment, for certain categories of employees, raises wages and benefit costs. Staffing is the largest expense for a home health agency and as such, a scenario with rising employment costs and flat to declining reimbursement negatively impacts margins. I don’t see this scenario changing any time soon.
Concluding, this may be one of my most depressing posts, if for no other reason than the current external view is dreary and nothing foreshadows improving weather. For brick and mortar providers, capital access is critical, especially for SNFs who have as a profile, some of the oldest physical plants. SNFs are capital-intensive operations and without an ability to fluidly and reasonably, access modest cost funds, deferred maintenance (already high) will increase. With so much revenue tied to reimbursement and a reimbursement outlook that is negative, it is unlikely that capital will flood back to the post-acute industry. Critically important to the viability of this sector is an improving economy combined with regulatory reform that, if reimbursement remains flat, allows providers to become truly more efficient. In short, increased program revenues under Medicare and Medicaid due to economic growth, will ease a lot of the immediate crunch and perhaps, buy sufficient time for absolutely critical, health policy reform.
Creeping slowly out of a period of recession where financing was nearly impossible to get, providers, operators and developers are starting to look favorably at new development and refreshment of existing properties and infrastructure. Though capital is less than free flowing, money is entering back into the long-term care and seniors housing world fluidly enough that projects once parked in the “back of the lot” are edging closer to the front. Having watched significant failures occur over the past three to four years and/or counseled organizations through some of the rough times, now is an appropriate time to pass along some “learnings” from the failures and struggles that I have seen. Importantly, as the industry and the methods for financing have fundamentally and permanently changed, so have the markers for assuring project (new, redevelopment and remodeling) success.
As a primer or if you prefer place to start, there are three basic elements critical to project (new construction or renovation) success: Market demand, cash flow margins, and project cost. Too many new projects failed to meet occupancy projections simply by misunderstanding market demand dynamics (market demand is not demography). While not universal or sacred to only non-profits, misunderstanding regarding cash flow margins is a common failure item. For example, I don’t know how many projects I’ve looked at, especially on the substantial remodeling side, that incorporated no expectation of new revenue or improved operating margins (either this element was missed or worse, not present/expected as a result of the project). Finally, project cost should always be less a function of funds available but more a function of payback. I’ve seen too many projects that suffer from “scope creep” simply because funds, either via debt or equity, were available. Being able to afford something doesn’t necessarily make it “affordable”, especially when the long range economics of a project are critically analyzed.
Avoiding the common traps, pitfalls, etc. that lead to project failure or in some cases, poor performance, is a function of being clear and knowledgeable about the core feasibility requirements. Being clear up front means not just “knowing or providing lip-service to” but actually investigating and working through each element.
- Market Demand: The presence of age and income qualified individuals is not demand; it is supply. The supply of potential customers only assures that potentially, a large enough universe of people exists that meet the broadest elements of “potential consumers”. Recognition that only so many of this universe will be actual consumers of any long-term care or seniors housing product at a given time is critical to developing the initial framework for market demand. For example, less than 10% of all seniors reside at a nursing home at any given time, whether for short or long-term care purposes. If occupancy rates within the existing supply of facilities are average to low, building more units within such a market is a big step toward potential failure. Simply adding units, even if they are different in size, amenities, etc., doesn’t change the core demand for the product. Success of such a project in such a market is thus fundamentally hinged on “taking existing customers” from an established facility; a risky proposition at best. Even in markets with good demographics (customer supply) and minimal to average supplies of like products doesn’t guarantee that demand is present. This is particularly true for seniors housing where demand is very price elastic. The same is true, though not as directly, for SNFs when demand is correlated to payer source (e.g., a private-pay only facility in a market with primarily a Medicaid demand). Without factoring in price and overall costs plus location and unit features and benefits, demand cannot be truly gauged or determined. The mere presence of a suitable supply of age and income qualified individuals doesn’t guarantee any occupancy of a new project, save that the new project at a given price, given location, with given features and benefits fits an unfulfilled need or want within the universe (supply) of qualified customers. Summarily, no matter how much money someone has or how age appropriate someone is, if that person (or persons) does not possess or find a need for a given product at a given price with desired features and benefits, the mere presence of the product within the market will not promote consumption (or occupancy).
- Financial Feasibility: Interconnected with a fundamental understanding of demand is pricing. Pricing, as I have written before, has two key components. The first is the derivation of price based on the formula of Fixed Costs + Variable Costs + Margin = Price. The second component is strategic, tied to market. In any given market, the supply of like products and programs will dictate the amount of elasticity that exists across the pricing continuum. No longer is “me too”or matching the market a viable strategy for pricing. This said, true financial feasibility is mostly tied to the first pricing component. Where projects tend to struggle is when three core elements are misinterpreted or, over (or in some cases under) estimated. The first core element is fixed cost. Feasibility which doesn’t properly capture the key fixed cost elements of debt, debt repayment and depreciation has the potential for quickly turning a project from possible to impractical. Specifically, I recommend the following approach to structuring the fixed cost portion of the feasibility.
- Debt assumptions, especially those involving floating rate scenarios, need to be conservative and reflective of the true interest rate risk across as lengthy a horizon as possible. Fixed rate scenarios are ideal but terms for the fixed period are generally less than the amortization schedule for the debt.
- Following the point above, debt repayment on a schedule that is more aggressive than the amortization schedule is a must. New projects or substantial remodeling projects carry the mindset that depreciation is a non-event in the initial years; minimal cash outlays. While this may be true, depreciation picks-up rather quickly in terms of cash needs by year 5 and becomes more acute by year 10. By year 15, substantial repairs and upgrades to major elements are a common theme. Carrying debt across a normative amortization cycle without more aggressive repayment means that by year 10, the project is being substantially replaced by the need for upgrades and repairs, all while the first phase is still being paid for at a premium cost (interest on the original debt). I have seen all too often, providers struggle with competing cash needs; debt service vs. capital maintenance. Once maintenance becomes deferred, the ability to compete successfully is hampered. Cardinal rule here: Work the feasibility numbers in terms of pricing to include a debt repayment plan no longer than fifteen years, regardless of the amortization terms, and incorporate a laddered assumption of cash needed (reserves) to replace equipment, upgrade units, etc. within the fixed costs assumptions (cash funding depreciation).
- Margin is the devil in the details. Too much fixed cost and/or too much variable cost eats at needed margins or stresses occupancy assumptions to unrealistic and/or unsustainable levels. Ideally, a forty percent or higher “top line” margin is the target for Assisted Living and Independent Living (marginally higher for Independent). When debt and depreciation (cash funded) is added below the line at stabilized occupancy, the project can create sustainable cash earnings/returns on equity. Lower leverage (debt) levels and lower interest costs can aid in thinning top line margin levels but remember, equity contributions instead of debt still bear a cost in the form of opportunity cost. Repayment of equity infusions need to be factored with an opportunity cost (interest factor). Depending on current interest rate environments, the arbitrage on equity cash can be positive (debt cost is higher) or negative (debt cost is lower). Not always does the provider get to pick the amount of equity participation required as lenders today are far pickier on leverage levels and loan to value relationships.
- Project Costs: Project costs should always be built around the assumption of revenue required to substantiate the project. Renovations that do not incorporate opportunities for new revenue or enhanced revenue (new product/service lines, better payer mix, etc.) will almost exclusively be paid-back through depreciation funding and life cycle cost assumptions. In short, no new money, the project scope needs to be tight. Rarely have I ever seen the purported “efficiencies” used in renovation justifications materialize to the extent that the gains justified the project scope. I also am always wary of renovations that incorporate enhanced or improved occupancy levels. Again, rarely does the cost justify the outcome and almost always, the adage of “we are not marketable” is more a function of other organizational issues (bad reputation, pricing, average care, etc.) than it is a justification for an expensive renovation project. In new projects/new development, building efficiency is the key to adequate payback. Allocating too much space to common areas and non-revenue producing areas increases project costs in terms of building and furnishing (not to mention heating, air conditioning, maintenance, upkeep, etc.) and places more “dead space cost” burden into the pricing equation. Objectively, a building that maximizes the majority of square footage for revenue production pays back investment far faster. In an Assisted Living project or Independent Living project, I think a 65% revenue allocation vs. 35% common allocation is reasonable. Higher allocations to common space strain pricing and definitely, require higher occupancy levels to create break-even and payback targets. Similarly, more common space consumes more “furnishings”, often minimally used. Good focal space done right and space with a multi-purpose use is preferrable over space with singular use or no real defined use at all (i.e., lounge