Senior Housing and the Real Estate Market – Status
While we are seeing incremental occupancy gains in senior housing, the increases are slow but steady. Is there a leveling-off point upcoming? Perhaps. Regardless, even with the recent history of gains, there is a reason to be a bit skeptical for some product types to continue to improve. My skepticism rests at the Independent Living product level, specifically on above-market rate units and entry fee units. The reasons are the real estate market and the economy.
IL housing and CCRC IL units are interconnected with the residential real estate market. Though demand for these product types has proven durable, the demand is highly price elastic. In other words, as these product types tend to be rather pricy, higher than comparable living conditions, economic forces that constrain value (either real estate or estate), shift demand away from higher priced product offerings. Today, the real estate market with its conditions somewhat similar to 2008-2010, is creating a negative drag for senior housing demand, specifically, entry-fee units and high-end above market rate IL units.
Per NIC (National lnvestment Center), while occupancy levels for IL improved in April 2023, the same remain 4.4% below pre-pandemic levels for the same period (March 2020). In the major metro areas that NIC tracks data, only 4 markets out of 31 have moved back or above, pre-pandemic levels (e.g., San Antonio and Pittsburg). Interesting to note however, is that the recovered levels still reflect occupancy averages below 90%.
Demographic trends for senior housing remain solid and new inventory is almost non-existent due to high development costs (interest rates and construction supply and labor costs). These forecast opportunity for occupancy improvement BUT, residential real estate conditions (current) create a significant drag. Higher interest rates (decade plus high) and tighter lending conditions plus a Fed Reserve that is not consuming mortgages today, suppresses buyers. While home values expressed as prices are stable to slightly increasing, the liquidity conditions necessary for homes to be fluidly sold (ready credit, favorable lending conditions), are not favorable today.
Below are some of the current non-favorable residential real estate conditions that are dragging home sales and thus, keeping seniors tight to their residence (and out of a CCRC/IL move queue).
- Supply of homes for sale overall is low, much due to existing residences with low interest rate mortgages (below 4%). These low rates make it exceptionally difficult for the current owner to sell and buy a new home with an equal cost-factor (same mortgage level).
- Zilllow is forecasting home prices to increase modestly over the next two to three years: 3% range with a peak or event slight fallback, possible. The cause is rising interest rates, credit tightening and an increase in housing supply but primarily, rental supply.
- The Case-Shiller/S&P Index for home values/prices illustrates a significant slow-down in home values. As long as mortgage rates remain high, combined with tightened bank credit policies, home values increases will be slower than 2019 to 2020.
- Mortage rate forecast track close to inflation expectations. Most economists believe inflation will remain higher than pre-pandemic levels for at least the next twelve months. While a recession will likely cause Federal Reserve rate reductions, the depth and strength of a full-blow economic slowdown will also, hurt home sales. Recessions typically come with job losses and job losses/higher unemployment drive buyers away from residential home purchases, pushing more people into rental real estate options.
Another overall set of numbers I am watching in conjunction with CCRC/IL demand tie to returns on investment assets or asset classes. CCRC movement in terms of new entrants is yes, impacted by the liquidity of residential real estate but similarly, by the overall condition of the economy. Social Security increases boosted incomes but, the reduction in overall estate values tied to other asset classes, puts a damper on the estate values of seniors. Reductions in investments and estate values, even if real estate prices remain solid, create a general sentiment of negativity such tha timing of making a major CCRC entry fee investment is viewed less favorably. Higher-end IL options are living choices not typically, living requirements. Sentiment, feelings about where the economy is at and where the health of an estate is at, propel or drag, investment and moving decisions. Today the sentiment is “drag”. Below is a graph illustrating inflation, the home value index (Case Shiller) and the Bank of America/U.S. Corp. Total Investment Return index tracked by the Federal Reserve. The blue line is CPI, the red line is the Case Shiller Index, and the green line is the Total Return Index.
While the Case Shiller trend has been modestly up and then steady to slightly down, the investment/total return index has been on a down trend for nearly three years – since September of 2020. Until this index comes closer to the inflation index which, will only really occur as inflation moves down, consumer sentiment about the economy will remain soft. This soft sentiment for senior adults with few years of life left for recovery, creates the pessimism around moving and investing in a higher cost, higher end lifestyle in CCRCs or high-end rental projects.
My outlook is for a softer demand cycle as long as economic conditions for investments and residential real estate remain proximal to their current position. Seniors will have less opportunity to liquidate a primary residence and while those that do will receive decent prices, their overall estate values in terms of real estate and savings, will have shrunk in real purchasing power. Inflation reduces wealth and purchasing power. The cures unfortunately, are a bit brutal and tend to impact middle class seniors the most, especially those in the prime age demographic for CCRCs and IL housing. Operators are going to have to continue to market and be creative and likely continue to use incentives, to gain incremental occuppancy.
Senior Housing/Senior Living Debt Review
Senior housing in the form of CCRCs, Independent Living and Assisted Living (including memory care) is a large user of debt financing. While equity has become more prevalent via increasing private equity interests in senior living, operators, especially non-profits, continue to rely heavily on bank and bond financing. Private equity and venture capital investment trends tend to curve toward newer projects, acquisitions, healthcare offerings on the post-acute side (home health for example) and other ancillary businesses (SNFists/intensivist physician practices, pharmacy, therapy). Given the current economic conditions and banking environment, now is a good time to take a look at where the senior housing/senior living industry is from a financing perspective.
Perhaps the largest current concern focuses on existing debt that comes due in 2023 and 2024. The industry will see billions of bank and bond debt that matures or has variable rate features that will reprice across the next twelve to eighteen months. Two challenges thus exist. First, the cost of capital, expressed as interest rates, is higher now than it has been for the last fifteen years. While the rate environment (expressed as climbing or falling) seems to tack to a stable point, inflation has yet to fall to Fed target levels. As long as inflation remains high, the risk of the Fed continuing to raise rates remains. Effectively, expiring debt that requires refinancing will cost more going forward. Debt that is variable and repricing will cost more. Depending on the rate increase level, providers may face significant margin erosion and/or operational drag as debt service costs increase. A chart of the last twenty years is below. More analysis is also available here: <a href=’https://www.macrotrends.net/2015/fed-funds-rate-historical-chart’>Federal Funds Rate – 62 Year Historical Chart</a>
The second challenge is capital access. While rate is a concern, accessing capital is also a concern as lending conditions have tightened due to bank capital structural changes and generalized commercial credit concerns – real estate in particular. Valuation challenges also come into play such that operators/owners may find the overall value of their projects has changed, negatively so. Credit access is not only a function of real property collateral (value) but also, the strength of operations to meet debt service requirements. With occupancy challenges remaining, though improvement is occurring, and costs rising faster than revenues in many organizations (labor, energy, supply), credit profiles for providers (owners) have changed – negatively. In short, the spigot of available capital is less open now than it was, pre-pandemic.
The pandemic slowed the pace of property improvement and to a certain extent, the deferred maintenance “bill” for needed improvement is now coming due. Per NIC (National Investment Conference), across 31 markets that they track for senior housing data, two-thirds of the communities in these markets are old and in need of improvement – redevelopment or major upgrade. This of course, begets a need for capital and today, the capital availability is not as prevalent as five years ago and the cost of the capital, three to five times more expensive.
When improvement is required, capital access and cost are relevant but so is the cost of the improvement. The industry is seeing a bit of a perfect storm (currently) as capital is more expensive and construction costs are as well. In this scenario. project feasibility and payback conditions become stressed. Infrastructure improvements or community updates and refreshment may be required just to retain occupancy or to manage market share BUT the same may beget no new revenue or minimal revenue increase opportunities, not proportional to the investment. For many of these older communities, market location and property composition are such that significant increased revenue opportunity is unlikely. Given this prospect, the alternative to improvement via financing may be for some, merger or affiliation. See my post on this topic here: https://wp.me/ptUlY-tH
Bank debt/lending continues to be the primary source for capital but recent banking failures have tightened lending activity. We saw a bit of improvement via mini-perm lending at FYE 2022 but even there, overall loan volumes remained down compared to pre-pandemic levels. Balances did stay near all-time highs for housing but nursing care balances reduced. Construction lending remained soft and I suspect, it will continue this trend for the balance of 2023 and into 2024. Nursing care construction lending remained suppressed and senior housing construction lending sat at a quarter of 2016 levels. A good overview from NIC is here: NIC_Lender_Survey_Report_4Q_2022_FINAL
What I’ll be watching are default levels and loan volume (new levels). If we see a condition of softening rates later this year, volumes will lag but loans in-queue will tick-up. There is definitely some pent-up demand for capital and any condition or combination, of softer rates and lower construction costs due to a recession or slower overall commercial activity will ignite senior housing capital access demand. I’ll also pay close attention going forward, to default or pre-default conditions that motivate additional acquisition and affiliation deals. Softer valuation levels are good for buyers that have existing capital capacity or in some cases, equity raised capital, ready for investment. The key is patience and market conditions that produce deals that have inherent, accretive value prospects.
Friday Feature: Three Trends to Watch
TGIF! This Friday, I’m focusing on three trends that I think, will have a major impact on healthcare and senior living for the balance of the year and likely, at least the first half of 2024. These trends are in no particular order.
Banking and Credit Struggles: This past week, the Federal Reserve provided some not too encouraging data and outlook on the banking sector via their regular Fed Survey. According to the quarterly Senior Loan Officer Survey, the number of banks increasing loan terms of industrial and commercial loans rose from 44.8% to 46% at the end of 2022. No doubt, this percentage is higher (still) for the first quarter of 2023. Among the conditions driving this tightening are lessening liquidity (deposit level shrinkage), credit quality deterioration (poor performance on loans issued/held), and significant reductions in borrower collateral positions. Loan demand, principally due to higher interest rates, is also significantly trending down for 2023.
Credit tightening and fallow credit demand are typically, signs of weakening economy and a possible recession. The challenge for senior housing and healthcare is that these industries tend to be almost recession proof and always, in need of credit for primarily, plant, property and equipment investment. The senior housing sector is a large consumer of credit for ongoing improvements and for expansion or merger/acquisitions. Likewise, the sector is vulnerable somewhat to rising interest rates as a significant amount of current debt is variable vs. fixed. Quick rate increases place loan covenants at-risk for default.
While I see an end to Fed rate hikes, I don’t see an end to inflation in the near term. With recent CPI (Core inflation too) running around 5% and the Fed funds rate, at 5% to 5.25%, we may see a “hold” period while the Fed waits for the lag effects to further diminish inflation. What is for certain, the current economic conditions will be significantly impactful for the healthcare/senior housing industries for the balance of 2023.
Employment/Labor: For all of healthcare, this is a major concern as demand exceeds supply in nearly all categories of employment and most acutely, for bedside/direct patient care staff. A possible recession and other industry slowdown will benefit healthcare and senior living via increased numbers of non-clinical staff needing work, but that same effect won’t move the supply “needle” on clinicians, especially nursing.
The trend here that I am watching is a bit nuanced. I’m watching the regulatory responses around staffing mandates, particularly in senior living/skilled nursing. The Biden administration has said, along with the 2024 SNF PPS rule that a staffing standard is forthcoming. We have yet to see it but states, such as Connecticut are somewhat ahead of the Feds. But, as of late, reality is beginning to settle-in; namely, the funding cost reality. Connecticut posed a per day increase in hours per patient from 3 to 4.1, along with ratios for certain positions. Both long-term care associations lobbied against the bill stating that while desirable for the industry to accomplish these levels, the reality is that supply won’t allow it. The state Office of Fiscal Analysis said the bill would require an increase in Medicaid spending by $26.6 million in 2025 and $15.5 million in 2026 and 2027.
Pennsylvania ticked-up staffing levels from 2.7 hours per day to 2.87, starting July 1. In July of 2024, the hours per day requirement jumps to 3.2 hours (direct care) per patient. Even though Pennsylvania increased its Medicaid reimbursement by 17.5% in 2017, funding woes for providers still persist. The genesis of the staffing level mandate is a report completed by the Pennsylvania State Government Commission. It noted that working conditions, training and career development were sorely needed to combat negatives about work in long-term care. The report further noted that long-term care spending needed an annual investment of $99.9 million to cover the cost of services which, translates to $12.50 per patient day increase or a Medicaid reimbursement rate of $263.05.
Finally, within the employment/labor trend, I’m watching legislative activity around staffing agencies and specifically, a move to cap the mark-ups that agencies can charge providers. Pennsylvania, in its report (noted) above, noted the rapid increase in agency costs to providers resulting from the pandemic and yet, the limited impact the fee increases matriculated to staff in the form of wages. A recently passed Indiana law includes a provision limiting “predatory practices” by agencies, specifically, price gouing. Minnesota is also working on legislation to increase funding and to in some ways, attempt to address staffing inadequacies.
Patient Transitions/Care Transitions: I’m continuing to watch the post-acute flow dynamics or the admission/transition referrals from hospitals to post-acute providers. My specific focus is on home health which seems to be struggling the most to sustain a referral dynamic that has home care preference but can’t be accommodated by home health agencies. The benefactor of this referral trend is the SNF industry. In a report from Trella Health for 3rd quarter 2022, the SNF industry saw a referral increase of 5.8% (YOY) and the home health industry saw a 8.6% decrease. Hospice referrals remained essentially unchanged. The data is for Medicare Fee-for-Service patients (traditional Medicare), excluding Medicare Advantage referrals. With the growth of Medicare Advantage, I expect to see a continued preference toward home/community discharges yet, staffing levels will dictate how this preference is realized. While home health has a distinct advantage in cost and desire by the patient typically, the setting has challenges to accommodate volume. Productivity levels are currently near the max for many agencies and thus, referral denials are at record levels.
Happy Mother’s Day to all moms and expecting moms, everywhere!
Senior Housing/Post-Acute Insurance Update
With so much going on in the industry post-COVID, challenging labor markets, rising interest rate costs, high inflation, and supply chain issues still somewhat bothersome, insurers are rightfully skittish about senior housing and the post-acute environment. Of course, good provides with solid track records, high quality records, low to no recent claims, and evidence of financial stability will achieve continued coverage, at the best rates. This said, rates are trending up and even the best providers will experience the industry drag effects that afflict all, some more and some less.
As I’ve written before, litigation is still a big issue and growing. Drivers include staffing shortages, COVID policies that caused isolation and physical/social decline, state laws without liability caps, and a generalized negative view of certain provider segments (e.g., SNFs). Three recent posts address some of these issues: https://wp.me/ptUlY-sg , https://wp.me/ptUlY-sp , https://wp.me/ptUlY-sC .
One developing trend has major forward ramification for liability coverage and worker’s compensation coverage – COVID litigation. A California Supreme Court case argued this week centers on “COVID take-home liability”. Formally, the case is Kuciemba, et.al., v. Victory Woodworks. It centers on the question of whether a spouse that is thought to have acquired COVID at work and subsequently, infected a family member at home, can sue his/her employer. The essential point is whether an employer (under California law) has the duty to exercise extraordinary care to prevent the spread of COVID. If the petitioner succeeds, the door is wide-open for extensive litigation, especially for SNFs, hospitals, and other healthcare settings where COVID outbreaks were prevalent, and staff infections, equally prevalent. The issue will no doubt hinge on the ability to prevent the spread of highly contagious, aerosolized viruses and the ability to detect where and when, the infection occurred. Studies of contact tracing during COVID illustrate the difficulty of identifying sources of COVID. More on this case is here: https://www.mcknights.com/news/employer-protections-in-spotlight-as-court-considers-take-home-covid-liability/
We are currently seeing a widening bifurcation of the industry segments between good performers and facilities/organizations that are more challenged. We are also seeing insurers becoming a bit more leery of location risks within states with litigious history and limited tort reform laws (e.g., California, New Jersey, New York). Greater focus is being placed on risk mitigation programs and compliance programs, so much so that providers without these programs are finding themselves in difficult positions when it comes to renewals (pricing and competition). The big watch of course is as identified in the prior paragraph, COVID litigation and litigation in general.
Below is the generalized trends for renewals, in the senior housing/post-acute industries. The data comes from WTW – Williams Tower Watson.
- General and Professional Liability: Flat to 15% for providers with good history/performance. Higher for poor performers and/or poor venues/locations.
- Property Insurance with high, stable census: Plus 10% to 20%.
- Property with challenged occupancy: Plus 25% to 40%.
- Worker’s Comp: Minus 5% to plus 2%.
- Auto: Plus 5% to 10%.
The challenges on the property side are driven by a number of factors. Recent hurricane losses and winter storm losses hit providers hard though, the driver is more about restoration costs and valuation difference than the actual loss numbers. Loss numbers are on a bit of an upward cycle but the economic conditions of tight supply chains (replacement building supplies), labor cost and shortages in construction trades, and the cost of money/capital are the primary contributing cost drivers. Insurers are wary that valuations are perhaps, significantly understated today and as such, policies are being written with higher retention levels and reduced overall limits to mitigate, valuation (understatement) risks.
Looking forward, I believe more of the same increase trend is on the horizon. It appears that we will begin to see some softer property renewals going forward as valuation risks abate and repair/replacement costs ameliorate. If a recession occurs in the latter half of the year and into 2024, supply costs will reduce even greater and labor costs, the same. The bigger horizon risk remains on the liability side and perhaps worker’s compensation due to COVID litigation. What happens in California will no doubt, have an impact nationwide. Some states and locales are reasonably well positioned with tort reforms in-place while others, are not, To date, absence precedent, COVID related litigation in the future, is unknown and unknowable.
Friday Feature: REIT Update
Like all healthcare/senior housing investments during the pandemic, REITs experienced turbulence and stagnant growth. Coming out of the pandemic, the outlook has started to brighten but, challenges remain in adjusting REIT portfolios. The adjustments are fundamentally, selling under-performing assets within their portfolios.
Rebounds in occupancy are providing some bright spots though assets within, remain a bit murky for most senior housing dominant REITs. Nursing home concentrations continue to lag in terms of recovery as average plant age remains “old”, occupancies are depressed (80% ish), operating costs have increased faster than revenues, and liability headwinds are increasing. Yet, some of the larger REITs are seeing their Senior Housing Operating Portfolios more favorably these days post Covid, primarily as product demand remains strong (demographics) and supply in relation, is rather flat to somewhat down (no real building going on). The strongest performance elements remain housing vs. health care or Independent, Assisted and Memory Care versus skilled nursing.
Dissecting where REITs are at, I took and in-depth look at two of the largest with extensive senior housing portfolios – Welltower and Ventas. Each has a different operating approach with Ventas, strictly providing investment and business guidance and infrastructure services and Welltower, actually providing direct management (though not for every asset). In late 2022, Welltower received permission from the IRS to direct manage 45,000 Independent Living units within its portfolio. Below is a summary of where each REIT is at and what they see as an outlook for the remainder of 2023 and early 2024.
Welltower: First quarter results were better than expected with year-over-year same shop net income growth of 11% advanced by net operating income growth within the senior living portfolio of 23.4%. The drivers were year-over-year occupancy and revenue growth per occupied room of 6.8%
From an investment perspective, Welltower did $785 million gross of investment activity comprised of $529 million in acquisitions and funded loans alongside $287 million in development funding. Within this development number were four projects at $57 million. There was $92 million of property dispositions and loan payoffs.
Welltower continues to rebalance its senior housing property portfolio, reducing SNF holdings and concomitant risk concentration. As part of this plan, Welltower continued to transition and sell its Pro Medica operated facilities (147 SNFs) to Integra Health Properties. In January, Welltower sold to Promedica, a 15% interest in 31 SNFs for $74 million. This represents the second piece of a Welltower/Integra 85/15 joint venture. The remaining components will finalize in 2023.
Going forward, Welltower is expecting continued occupancy improvement to drive same shop operating revenue gains of 9.5%. Improving labor outlook in terms of hiring and retention is also adding positivity to improved performance outlooks. Year-over-year occupancy gains are projected at 230 basis points. From their investment presentation: Positive revenue and expense trends are expected to drive YoY SS SHO Portfolio NOI growth of 17% – 24%.
As the senior housing industry has headwinds, Welltower will no doubt experience some. The question is, how much and when. Higher interest rates and a stronger dollar will affect dividends. The same, could create a recession and thus, drag some occupancy rate projections downward. A recessionary job market, however, could add incremental labor gains at softer prices (wages).
Ventas: Ventas first quarter earnings report is set for release on Monday, close of market. We can, however, see a similar recovery trend for Ventas as with Welltower, improving occupancy, more stable expenses, and increasing same shop revenues via improved pricing and occupancy. Fourth quarter 2022 saw an overall portfolio occupancy improvement to 82.5% and a Net Operating Income for the portfolio of 19.1%.
Like Welltower, Ventas is bullish on demographic trends noting the growth percentage of the 80 plus segment/cohort of the population. In the next five years, the growth rate for this group is forecasted at 23%. Couple this demographic shift with a historically low new unit pipeline (COVID and interest rate impacted), unit absorption of existing product begets a favorable occupancy trend, at least in the near term. For Ventas, 99% of their portfolio is in locations with no new construction starts within 5 miles. A primary market for a senior housing location is 5 to 7 miles.
For occupancy growth, Ventas is projecting year-over-year improvement of between 130 and 170 basis points – a bit less bullish than Omega. Overall portfolio revenue growth of 8% is the forecast with NOI growth at 5%. They are expecting improved hiring and moderating inflation, along with improved topline revenues, to generate the NOI improvement.
Rent increases and care rate increases are forecasted at 10% and 11% respectively. What is interesting to me is the forecast on expense improvements. Labor is pegged at 43% of revenue (61% of expenses) with only 2% equating to contract labor. That is exceptionally low in today’s market and certainly, not indicative of a trend I have seen among most operators. In all other expense categories, Ventas if forecasting decreases (-5% taxes, -4% in food, utilities, and maintenance, and -2% in insurance). This pegs year-over-year expense growth at 5% vs. 2022, at 8%.
To me, the risks of achieving these results are similar to Welltower. First, moderating labor cost may or may not materialize though, a recession could help. Interest rate increases could push the economy into a recession, cramping occupancy gains. Energy is a wild card for me from an inflationary perspective as during a recession, gas/fuel oil will fall via weaker demand and as stronger dollar yet worldwide turbulence, may throw a wrench into this outcome. Insurance costs are rising so it’s odd to me that a savings of 2% is attainable across any senior housing portfolio.
After Monday, I’ll take a peek at Ventas first quarter results and then, add it to my files. Later summer, I’ll take an overall look at the REIT sector and maybe, drop a quick update to this post.
TGIF!
Friday Feature: The Supreme Court and Medicaid Beneficiary Rights to Sue
TGIF! In a little known but important case argued in November of 2022, the family of a Medicaid nursing home resident in Indiana began a suit against a publicly owned nursing home (originally 2016), Valparaiso Care and Rehabilitation. The nursing home is operated by the Health and Hospital Corp. of Marion County. The corporation’s board is appointed by the mayor of Indianapolis and the Marion County Commission and city council. A ruling is expected from the Court soon.
The Talevski family sued the Health and Hospital Corp. after their father was denied readmission to the facility, alleging he was cared for by Valparaiso and other facilities, negligently. He passed away due to complications from dementia but during his initial stay and subsequent travels among nursing homes, the family argued that he was excessively drugged – six psychotropics. The nursing home claimed that the elderly gentlemen became violent, sexually aggressive, necessitating a transfer to another facility more capable of caring for him. The other facility was an hour away from the family. The family said the facility tried to transfer him to another facility even farther away – 2 plus hours. The facility, Valparaiso, refused to take him back.
After the facility refused to accept the readmission, the family sued. One of the daughters is an attorney. The basis of the suit against the Health and Hospital Corp. is that the extensive use of medication, unwarranted and against federal law (SNF Conditions of Participation), and his unauthorized transfers against his rights, violated his rights under federal law. This law, the Federal Conditions of Participation for SNFs, regulates care provided to Medicaid and Medicare beneficiaries. The suit alleges that it is fundamentally illegal to harm patients, provide substandard care, and received Medicaid reimbursement. The suit seeks redress for the rights violations against the County.
At issue is whether a beneficiary can sue a governmental entity for breaches of rights under a federal program or denial of benefits under a federal program such as Medicaid. The argument against the suit is that programs like Medicaid are a joint federal-state funding contract and as such, beneficiaries don’t have the right to sue based solely on this relationship. The question thus is, can individuals interfere with or become a party to, a contractual relationship between the state and federal government?
The implications of this suit are enormous for seniors in the Medicaid program and for providers that care for Medicaid beneficiaries. For beneficiaries, the risk of loss in this case is that they would not be able to sue a government or governmental agency for things as simple as a denial of benefits, even if they are eligible under Medicaid criteria. Administrative procedure may be the only method for addressing complaints or benefit issues.
Providers and governments take the opposite approach indicating that a codification of a right of a beneficiary to sue could create havoc for key programs such as Medicaid waiver (home, community-based services) programs, PACE, Special Needs Plans, etc. They say that lawsuits don’t create a remedy but do ultimately, push unnecessary litigation costs and damage claims into the program such that funding elements would be harmed.
Court watchers see parallels with a decision and the recent Dobbs abortion ruling – a question of rights and access to certain care and services. Some believe the Court may attempt to place limits around certain beneficiaries and litigation such as the ability to sue nursing homes using provisions in the Federal Conditions of Participation as a basis; a patient/resident rights violation. The thought here is that rule enforcement or rule violations when not enforced or addressed, is a regulatory function. There is no likelihood that the Court would speak to any issue of harm due to poor care which, is a different matter and not part of this suit directly.
I’m fascinated by this case as there is so much at stake for Medicaid beneficiaries and providers in the Medicaid program. Its nuances and challenges are many. It is a poster case, in my opinion, for the overall argument that these programs, Medicaid and Medicare, have become too bureaucratic, over-regulated, and incapable of truly supporting and addressing, the real needs of their beneficiaries.
A good synopsis of the case and the issues is here: https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2022/11/28/supreme-court-case-could-curtail-rights-of-medicaid-patients
Executive Order – Staffing and Medicare Implications Update
Yesterday I wrote a post regarding a significant (and large) Executive Order coming via the Biden Administration concerning long-term care, child care, staffing in nursing homes, expanded supports under Medicaid for long-term care and childcare, etc. The post is here: https://wp.me/ptUlY-uM . While I have yet to obtain the text of the order, I have watched and read various reports on the Order, the most direct being the White House Press Release on the order. It is here, in case anyone is interested: https://www.whitehouse.gov/briefing-room/statements-releases/2023/04/18/fact-sheet-biden-harris-administration-announces-most-sweeping-set-of-executive-actions-to-improve-care-in-history/
What fascinates me about Biden’s Executive Order is how disconnected from reality it truly is. For example, it comes with no projected additional funding. Biden claims no additional money is needed; in fact, his quote is: “The executive order doesn’t require any new spending. It’s about making sure taxpayers will get the best value for the investments they’ve already made.” I for one would argue that he is half-right as there is ample money in Medicare and Medicaid to improve direct care reimbursement for staff wages, etc. The problem, however, is that both programs are so bureaucratically mired in politics and regulatory agenda that money is misallocated. Unless both programs undergo significant reform, the reality is, additional funding is necessary to improve access and staffing.
The other major disconnect Biden/Washington has is at the provider level, community level. I’ve written about this disconnect before. Mandates don’t make reality change. There simply are not enough staff (supply) to meet demand. If increased access is desired, mandates that are anathema to more provider capacity, are a drag to progress. In other words, more access can only be achieved by creating more staff to care for people yet, the Executive Order offers no incentive or policy initiative to increase supply (nurses, nursing assistants, etc.). Further, penalizing providers by reducing reimbursement for turnover when most turnover is out of their control, will further worsen the staffing crisis. I’m truly perplexed at this Order and the logic (if any) behind it.
Below is an excerpt from a statement issued by LeadingAge’s CEO, Katie Smith Sloan, on the Executive Order. I think this sums up the industry view fairly well.
“LeadingAge has long advocated for an all-of-government approach to ensuring greater access to aging services—and addressing the workforce crisis must be the top priority. Today’s announcement shows that the Biden White House has been listening—but, sadly, the order does not meet the ever-growing needs of America’s older adults and families.
- The focus on home and community-based services is too limited and must extend beyond care in the home to address the breadth of the aging care continuum. It doesn’t provide support for other care settings like adult day programs, assisted living, hospice and more, on which millions of older adults and families rely.
- What’s worse, the administration’s approach favors one part of the continuum over another. The order bolsters the home care workforce, while punishing nursing home providers for shortages—despite the reality that employers in both care settings navigate the same challenges in a competitive labor market.
- The administration is still getting it wrong on nursing homes. Over a million older adults rely on the specialized care only nursing homes provide. Already, nursing homes around the country are closing or limiting admissions due to staffing shortages. Why take that option away from the people who need it by implementing punitive policies that potentially worsen, rather than remedy, the ongoing staffing crisis? We are particularly concerned by the threat of withholding Medicare payment if providers don’t have workers – when workers simply don’t exist.
Without staff there is no care. We still desperately need to remedy the severe workforce crisis in long-term care. In addition to increasing reimbursement and wages, the country must address immigration to build a pipeline of new workers through proven programs and pathways for those ready and willing to work in our field”.
Staffing and Turnover: Medicare Payment Implications?
This morning, I caught some reporting on the Biden Administration’s plan to issue an executive order, a rather large order, that will include several provisions related to jobs and long-term care. Recall in recent articles on staffing on this site, I’ve noted that the Biden Administration and CMS are working on promulgating rules under Medicare for required direct care staffing levels in SNFs and ultimately, tying these levels and turnover to Medicare payment in some regard. This is an off-shoot or addition to other non-staffing related VBP (Value Based Purchasing) elements already in-place or soon to be added. See my post here on the recently released SNF Proposed 2024 rule: https://wp.me/ptUlY-tj
The order is expected to include direction to DHHS (Dept. of Health) to adopt a series of rules that add to minimum/mandatory staffing levels for SNFs (these levels yet unknown) and to condition some elements of Medicare reimbursement to staff turnover at the SNF. The expectation remains that DHHS and CMS release the proposed staffing rule yet this year (some say spring, but I doubt that timing).
Also within the order is a directive to cabinet level agencies (e.g., Interior, Commerce, Energy, Education, etc.) to expand access to long-term care and childcare and, provide financial support to workers for these services. The objective is to improve access to care and support for people such that the same with financial support, will allow caregivers to thus, be employed rather than staying at-home to support childcare or adult care. The rule will also seek to have Medicaid dollars apply to fund an increase in home care workers to support additional seniors and the disabled accessing care under Medicaid.
The devil, as always, will be in the details. I’ll be watching for the final order once it is signed and released. Typically, these kinds of Executive Actions/Orders come with little detail as they are a series of directives to cabinet agencies to develop the rules and apply them going forward. What is clear is that the Biden Administration is heavily invested in creating some kind of staffing mandate for SNFs and tying the same to reimbursement. As I have written before, I’m not sure a mandate in an environment with a caregiver supply problem is going to do anything other than create additional economic hardship for providers that already, can’t obtain enough staff. Similarly, while I know turnover is a problem in the industry, many of the turnover drivers (regulations, aged facilities, inadequate numbers of staff, negative regulatory environment, etc.) are beyond control of the industry.
Medicare Claims, Audits, Denials and AI
AI or Artificial Intelligence has been in the news a lot over the past few months. ChatGPT is the program that I’ve seen the most about. Elon Musk has come forward warning of the advance of AI and its implications for societies. I’ve seen story after story about how AI has the potential to be a “game changer” in medicine and in science advances but also, how it has the potential to produce scary outcomes. Heck, even Joe Rogan is sounding the alarm after a full version of his podcast was done through an AI creation.
As one would suspect, the advances in AI are finding their way into Medicare and Medicaid to adjudicate claims and to detect potential fraud. The first and most prominent use (for AI) is within Medicare Advantage plans. In an analysis published in the health and life sciences publication STAT, the authors found insurers in the Medicare Advantage plans using AI based algorithms to determine post-acute lengths of stay as well as for prior authorizations for certain levels and amounts of care. The purpose is to place a “best practice” construct around certain diagnoses and conditions, reducing variability. Sounds good in theory.
I have been a proponent of the development of clinical algorithms based on certain diagnoses and patient comorbidities. Readers can find some of those algorithms posted on this blog. I also received a U.S. patent for the development of a web based chronic disease management system that involved a highly integrated series of algorithms and pathways to assist patients and physicians with the management of Type 2 diabetes. What I have never been a proponent of is rigidity such that the pathway or the algorithm is the sole determinant of a patient’s care journey and treatment regimen. Every patient is different and some because of the influence of non-medical issues in their life, will require more integrated approaches in their care and treatment plans. For example, where a patient lives (environment, stairs, etc.), who the patient lives with (caregiver?), and what resources the patient has for assistance are all important factors in determining length of stay in a post-acute setting. In other words, some folks need more time, some can advance to discharge sooner.
The government/CMS has been integrating evidence-based algorithms/pathways/protocols into claims reviews and claim adjudication for several years. InterQual Criteria, a McKesson Health Solutions product has been used by MAC (Medicare Administrative Contractors), QIOs (quality improvement organizations) and Administrative Law Judges for years; two plus decades (https://www.businesswire.com/news/home/20161219005102/en/CMS-to-Continue-Use-of-InterQual-Criteria). The theory is that highly researched and fine-tuned, evidence-based data tools can provide a proper roadmap for treatment that emphasizes efficiency and reduced variability and negative outcomes. Code words for “reduce costs”, primarily. I haven’t seen a whole lot of better care, especially in terms of reductions in repeat utilization patters (re-hospitalizations, etc.) among the elderly, especially those with multiple comorbidities.
A rather good report was done on the heels of the STAT article by the Center for Medicare Advocacy. That report can be downloaded here: AI-Tools-In-Medicare What I noticed as most interesting in the report is the discussion around slippery-slopes and the gaps between what AI does/doesn’t do and what role humans and policy, play. For example, the Jimmo v. Sebellius case and its implications. Jimmo’s decision is fundamentally contrary to how AI is being used to determine continued coverage. Where AI is used to factor when care (and thus coverage) should end under Medicare, Jimmo basically says that coverage is not dependent on improvement or potential for improvement and can continue if the goal is to resist deterioration or is required by the patient’s need for skilled care.
Coverage does not depend “on the presence or absence of an individual’s
potential for improvement, but rather on the beneficiary’s need for skilled care.” The settlement
re-emphasized what was already provided for by regulation: restoration potential is not the
deciding factor in determining whether skilled care is required. Skilled nursing or therapy
services are coverable when an individualized assessment of the beneficiary’s clinical condition
indicates that the specialized judgment, knowledge, and skills of a nurse or therapist are
necessary to safely and effectively deliver services. The settlement applies in the skilled
nursing facility, home health, and outpatient physical therapy settings.
As AI use advances within reimbursed health care, the likelihood of a continued disconnect between providers and insurers and ultimately, patients will grove. We have an aging society that will continue to demand and utilized, more health care resources. The federal govt. is intent to continue to drive enrollment in Medicare Advantage plans as traditional Medicare Parts A and B continue to have funding challenges and face, default conditions as tax revenues and fees are headed to a condition of inadequacy to fund the outlays. While evidence-based medicine and the algorithms it can produce have great promise in many regards, reliance on overly broad, one size fits all approaches can cause unintended consequences in terms of overall patient care and quality. When reducing utilization and thus, saving dollars is the primary goal, a short-sighted impact is likely – the forest for the trees adage applies. A good article to wrap this post is here: https://skillednursingnews.com/2023/03/ai-use-by-medicare-advantage-blamed-for-increased-denial-of-nursing-home-services/
Econ Update
In this new category of snapshots, I’ll grab some data and headlines and offer a few insights on a topic. This week is full of key economic data regarding inflation. Reading through the data for many can be a bit daunting. Likewise, lots of the data is more geeky than useful in daily life and business.
For healthcare, economic conditions of late (last eighteen months) have provided staunch and daunting headwinds. Capital costs have risen dramatically due to Federal Reserve monetary policy changes to fight inflation (interbank rate increases). Energy inflation has yanked utility costs upward and forced suppliers to raise prices on delivered goods and services. Supply chain issues have created product scarcity ranging from drugs to infant formula to food and consumables to big capital equipment items such as elevators and their parts and electric equipment such as switchgear. No provider type has been immune to harm from the shifting economic conditions, namely rising inflation and rising interest rates.
Quickly, inflation primarily comes about or occurs via an oversupply of money and not enough goods and services for the money to purchase. Simplistically, this is called “too many dollars chasing too few goods”. As the goods are fewer in number than the buyers with dollars, the goods escalate in price – sold to the highest payer. In some cases, such as energy, supply and demand are a bit tricker to sort through as energy tends to be inelastic in demand meaning, there are few if any substitute products for it. Eventually, buyers can use or consume less but in reality, price will not significantly alter energy consumption (gasoline for example or fuel oil/diesel).
In a more intellectual view of inflation, we see government policy taking the lead role in creation or stopping inflationary trend. The economist Milton Friedman noted that all inflation in an economy is basically due to government spending in or at levels, greater than economic growth measured by GDP (gross domestic product). Per Friedman, when government adds money to the economy by spending but does so unattached to productive output (no real return on investment), inflation will occur. Friedman suggests that the real remedy to inflation is for government to spend less or different.
So as we turn to this week’s economic data, we get results that suggest, we have a ways to go before the economy is “healthy”. I use healthy to mean inflation that is in equilibrium to GDP growth, or below. Until we get to this level, we will continue to see inflationary pressures or the alternative, recession and possible stagflation (inflation higher than GDP growth for prolong periods).
The numbers this week and what they mean (quickly).
- Prices remain a bit hot with March’s increase a blip over February (.1) and year-over-year, up 5%. Removing Food and Energy components, inflation was a bit hotter at + .4% for the month and 5.4% for the year. What concerns me here is that the drop to 5% year-over-year is due principally, to energy and food. The current energy trend, however, is not indicative of future drops (see current gas price shifts “up”). OPEC production cuts and continued fed policy constraints on domestic oil and natural gas production may mean that this is the low point of energy softness. Expect the Federal Reserve to push another .25% in a rate increase taking the fed funds rate into a 5% base rate. Here’s the report: https://www.bls.gov/cpi/
- The cousin to CPI is PPI or the final measure of price of products and services produced in the economy by manufacturers/business. It is the crystal ball so to speak, of where CPI will head and where the value of the dollar is trending. Hot PPI suggests future cost increases. Cold or declining PPI suggests economic demand softening (this is a demand side measure) and a weakening of the dollar. For March, the number continued to soften as Fed Reserve interest rates reduced economic demand, devalued the dollar and energy costs pulled back. The decline for the month was .05%. My concern with this measure is a bold signal of recession and erosion of the value of the dollar. Here’s the PPI report: https://www.bls.gov/ppi/
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