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!
Senior Housing Marketing: Bumpy Road Ahead
On Wednesday, the Federal Reserve added another .25 point to its baseline interest rate – federal funds rate. The rationale is to continue to reduce inflation which, is running at decade highs. The trickle-down effect will begin with capital costs and capital access, impacting all kinds of industries but first and foremost, the real estate industry (commercial and residential). Borrowing costs and access to funds has changed dramatically since 2020. In mid-2020, mortgages were widely available below 3% fixed for 30 years. Residential real estate rode a significant wave in rising housing prices and rapid sales.
Today, the residential market has ground to a near halt. While home prices remain steady to a large extent, buyers have fled due to high mortgage costs and bank lending constriction. Recent bank failures have not helped banking confidence or improved lending access, personal or commercial. As a result of the Fed’s need to fight inflation and to reduce overall liquidity in the monetary system (lower money supply), the Fed quit buying mortgage-backed securities in March, therefore no longer directly supporting the mortgage market. Without the Fed keeping the liquidity of the mortgage market “up”, mortgage rates will remain higher for a longer period and banks will be pickier about lending as the buyers for mortgages are now private entities, more concerned about profit and the underlying credit.
So as not to confuse my readers, the title of this post is right-on and while a bit of economics starts this post, it is relevant to senior housing. Senior housing, especially independent, above-market products rental and entry-fee are very much occupancy impacted by the residential real estate market. I have written and spoken about this connection for years. The typical senior housing move is a transition from a private residence of some sort with the proceeds from the sale, used as a resource for the senior housing stay. With entry fee sales, the net proceeds from the home sale very much correlates to the resource for the entry fee. Market data has shown us for decades that there is a very strong relationship in the sales process between what a resident in a market area can liquidate his/her residence for and what the net proceeds will “purchase” in term of a CCRC unit. Well positioned CCRCs in a market have entry fees very closely tied to the average net sale value of homes in the primary market. Even today, few seniors will want to dip into estate values to pay for a senior housing unit. A good resource is a presentation I did a few years back: Value Propositions and Markteting 4 14
The primary factors that drive new sales and work on impacting occupancy positively, are as follows.
- Demographics in the target market – age, net worth, income level favorably matched against the product (price, demographic, location)
- Overall supply of units in the market current and anticipated. Senior housing demand is very elastic. Supply ranges of product will shift based on the price and the economic conditions within the market area.
- The condition of the residential real estate market in the primary market area. While national trends are one thing, the translation of those trends locally is the key. Not all local markets fare equally to the national trend. Interest rates aside, a growing market may attract more buyers still willing and financially capable of buying homes, even at a premium (see Florid for example).
- The condition of the property/senior living site. Is it in good condition and is its reputation positive.
The trends in occupancy and thus, marketing have shifted dramatically as a result of the pandemic. Occupancy in rental and entry-fee projects for the most part, remain below pre-pandemic levels. While CCRC occupancies are strongest and still growing (albeit slowly), at the present course of improvement, we are approximately 2.5 years away from pre-pandemic levels (91% vs. 87% today). This time period may elongate if interest rates remain high and real estate inventory (for sale), remains low.
During the pandemic, to maintain and attempt to increase occupancy via sales, I noticed a lot of communities resorting to incentives of one form or another. Fortunately for the CCRC/senior housing market, new inventory slowed and remains slow. Existing units today, have a greater opportunity to gain ground as new product is not coming on the market with the same fluidity as pre-2019. Capital access and costs have abated many new, planned projects either permanently or temporarily.
Incentives have long been a staple of generating unit pre-sales, holds, and interest/waiting lists. Conversion to occupancy often includes different incentives, directly tied typically, to rent abatement or stabilization (so many months free, no rent increase for so many months, etc.). Other softer incentives include moving fees (pay for the move), meal additions, decorator services, relocation coordination, etc.
The road however today, is bumpy and will be so for a while. Two difficult financial/economic conditions are at-play and both, hamper demand when the desire, is to sell above-market cost units. First, the real estate market in terms of liquidity, is exceptionally slow. New listings lag from pre-pandemic levels and new sales the same. A good data source that I use to watch these trends is here: https://www.redfin.com/news/data-center/
The second condition is overall estate values are down. Seniors with market investments in their retirement plans have seen minimally, on average, a 25% erosion in value. This constriction reduces their willingness and confidence to buy into, more expensive (real or perceived) housing. Further, familial support or influence tracks a similar downward confidence curve meaning, family become less supportive of a move that is further perceived, as negative to estate values. Remember, the U.S. mindset still has a strong connection to passed-through or down wealth transfer (e.g., kids receiving inheritance from mom and dad).
Strategies do exist for CCRCs and other senior housing projects to make inroads in occupancy gains, even in a tight market. Here are a few that I have used and can recommend as having some value.
- Use equity and/or internal financing mechanisms to assist in achieving liquidity for a senior’s home. Banks will typically step forward if the home has substantial equity and are often willing, if the CCRC is a partner, to provide the loan allowing a move to occur. The challenge then falls on maintaining the vacant property but that is less difficult than one would think with a bit of creativity.
- Defer the entry fee to a later date. Take the move off the table so to speak, allowing the senior to move while the house is still on the market, even if the timeframe is elongated. Another option is to pay the entry fee in installments.
- Work with a realtor that will package a transition service at a reduced commission allowing for home sale/pricing flexibility.
- Purchase the home, if feasible. I have seen organizations do this and then, when market conditions change, resale the home. This is complex and fraught with all kinds of detail issues, but it can be done.
Medicare Advantage/Part D Final Rule
Early in April, CMS released the 2024 Medicare Advantage/Part D Final Rule and within, there are a number of interesting policy shifts that could benefit providers. The rule addresses a common practice that has been frankly, often abused by Med Advantage plans – prior authorizations or more commonly known as, “prior auths”. The crux is authorization provisions created delays in care and sometimes, denials for services that the patient and/or his/her physician believes are medically necessary. The SNF industry has most often been on the denial side of prior authorization requirements, either for the whole stay (initial transfer) or for a requested longer stay. The fact sheet for the final rule is here: https://www.cms.gov/newsroom/fact-sheets/2024-medicare-advantage-and-part-d-final-rule-cms-4201-f
With respect to prior authorizations, the rule seeks to make their use more connected to national coverage determinations (NCDs) and local coverage determinations (LCD), common to traditional Medicare. Back in April of 2022, the HHS Inspector General issued a report that included findings of Med Advantage plans use of authorization provisions to issue fairly widespread denials for various care and services. The denials either bar access to care for the patient or in some cases, deny payment to the provider for care and services rendered, subsequently determined by the Med Advantage plan to be “not medically necessary”.
The study noted that the Med Advantage plans were using medical criteria more restrictive than criteria under traditional Medicare (the national or local coverage determinations). Among cases reviewed, 13% of the Med Advantage denials were for care or services that would be covered under traditional Medicare. Other denials were technical in nature whereby the Med Advantage plan denied an authorization as insufficient in documentation yet, the patient medical record contained sufficient documentation of the medical need. In the cases of payment denials, while the payment requests were proper in terms of meeting Medicare criteria, the denials that did occur were due to processing or human claim review error. At a rate of 18%, this is a bit alarming as Medicare fee-for-service claims, properly billed, don’t have such an error rate. The OIG report is here: https://oig.hhs.gov/oei/reports/OEI-09-18-00260.asp
Another target within the rule with respect to Medicare Advantage plans has to do with marketing practices. The plans have become popular such that today, 45 % of all Medicare beneficiaries are enrolled in Med Advantage plans. Medicare anticipates this number to rise to 50% by 2025. Apparently, those annoying generic television ads promoting various Medicare Advantage plan features, some featuring celebrities like JJ Walker and Joe Namath, have gotten notice in Washington. No longer will that style of ad be permitted instead, requiring a specific plan to be identified and each ad, to eliminate images and language that is confusing or misleading (not sure how that will be monitored).
Another change or improvement relates to behavioral health access and coverage criteria. CMS is finalizing a new set of rules requiring Medicare Advantage plans to: “(1) add Clinical Psychologists and Licensed Clinical Social Workers as specialty types for which we set network standards, and make these types eligible for the 10-percentage point telehealth credit; (2) amend general access to services standards to include explicitly behavioral health services; (3) codify standards for appointment wait times for primary care and behavioral health services; (4) clarify that emergency behavioral health services must not be subject to prior authorization; (5) require that MA organizations notify enrollees when the enrollee’s behavioral health or primary care provider(s) are dropped midyear from networks; and (6) require MA organizations to establish care coordination programs, including coordination of community, social, and behavioral health services to help move towards parity between behavioral health and physical health services and advance whole-person care.”
I’m encouraging providers to read the rule’s fact sheet. Medicare Advantage providers will not simply or quickly, make wholesale adjustments to their existing practices because of this rule. Additionally, providers should always be aware of National and Local Coverage Determinations and use the same, as a “road map” for dealing with Med Advantage coverage and authorization issues. Providers will need to push the plans to make proper adjustments accordingly and to protect and advocate, for their patients. It will take time for the Med Advantage industry to adjust but, movement will happen quicker if providers hold the plans accountable.
Friday Feature: The Economic Realities
For the past two years, as the pandemic emergency waned, and the U.S. and the rest of the world moved back to a more normalized business and social condition, the fallouts of a mish-mashed pandemic policy (federal, states, local) became evident. School closures with virtual learning impacted kids and their education performance (falling performance on reading and math). Enormous governmental outlays and supports to the tune of trillions, revealed fraud (PPP), begat inflation, and assisted in dislocating millions of people from the workforce via subsidies (rent abatements, student loan payment abatement, enhanced unemployment, etc.). What we know is that short-term measures without a longer-term view of the resultant impacts, can lead to troubling economic times, and sometimes, the cure in terms of pain is worse than the original condition.
This morning, core inflation data was released, known as PCE (personal consumption expenditure). What we see is continued inflation above the Fed target of 2%. PCE measures personal consumption, removing volatile components such as food and energy. This report showed that inflation, minus food and energy, ticked-up in March and rested at 5% year-over-year. With energy such as gas on the rise, expect the CPI number with food and energy included, to continue to be at or above 6%. Here is this morning’s PCE release: https://www.bea.gov/news/2023/personal-income-and-outlays-february-2023
Earlier in the week, another key economic number was released – GDP or Gross Domestic Product. GDP data represents the growth rate of the economy as measured by the sum total of goods and services produced by economic activity. The first quarter number was 1.1%. This result is down from the prior quarter measure of 2.2%. GDP releases are initial and then adjusted, with adjustments typically moving the initial number down. With inflation running significantly above GDP 1.1% vs. 5% PCE and/or 6+% CPI, the economy is either in a state of or moving towards (quickly) a condition known as stagflation and perhaps, recession. Stagflation occurs when inflation runs considerably higher than GDP growth. Here is the GDP report: https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate
So, what does this data translate into for the near-term outlook for the economy? Answer: More of the same struggles and perhaps, some additional challenges. Interest rates will continue to rise as the Federal Reserve is likely to add another .25% rate hike to its core borrowing rate (fed funds rate), now at 4.75 to 5%. This will push the rate to 5 to 5.25%. A traditional economic principle starts to become evident: Fed rates at or above the rate of inflation drive inflation via demand reduction, down. If as suspected, the core inflation driver is 5% or thereabout, a fed funds rate at 5% to 5.25% should significantly slow the economy and move inflation down. The problem is the lag in seeing the impact and whether, the impact will in turn, push the economy into recession.
For senior housing and post-acute care, the current economic conditions are problematic (kindly stated). Real wages are not yet, keeping up with inflation meaning staffing costs will continue to have upward pressures. Borrowing costs are now crazy high and yet, reimbursement rates are not keeping up in growth, with the increasing cost of capital. For debt that is variable, providers are getting a rude and frequent awakening with increasing index rates pegged to the borrowing costs on the debt – rates therefore, rising. I’m watching growing debt defaults for senior housing as expenses have risen, borrowing costs the same in some cases, while revenues are flat or modestly higher but in no way, keeping up with the expense increases. The result is margin reduction and of course, reduced cash flow, translating into lower levels of income available for debt (below covenants).
Here’s a quick snapshot of economic data and conditions to watch over the next quarter.
- Bank capacity and willingness to lend. Credit is tightening and banks with deposit runs, are not capable of generating the same lending levels as before. This will hamper access to credit.
- As I have written about before, a non-existent (or very, very sluggish) home sale market due to high borrowing costs turns real estate primarily illiquid. This is not good news for seniors seeking or needing to sell a home to move into a senior housing project. With occupancy rates still below pre-pandemic levels, CCRCs and other senior housing providers will likely continue to struggle to move occupancy up due to the housing market challenges.
- Access to capital for capital improvements is a necessity for the senior housing sector. I expect a year of tough sledding in terms of capital access and thus, a creep-up in average age of plant with deferred maintenance being the driver (this year).
- Mergers and Acquisitions will also slow (already down) due to higher costs of capital and economic uncertainty. This may mean, with fewer buyers/acquirers, some projects/providers fall into closure/bankruptcy.
- If there is a bit of good news, it may come a bit later this year, in the labor market. The impact will not be on the clinical side but on the non-clinical side. Layoffs which are occurring, will accelerate if further demand reduction in the economy occurs. This will move people into situations where shifting industries for work occurs. In other words, fall-out in construction could beget maintenance staff (an example).
TGIF and Happy Weekend to all!
Top 5 Staff Retention Tips for a Tough Labor Market
Recently, I wrote a post on recruitment in a tough labor market. Suffice to say, I have not in my three decades plus career, seen a tougher labor market for clinical staff (all staff in many regards). COVID had a lot to do with the shifting supply of labor, but I’ll offer that health policies and economic policies during the prime pandemic period and since, had far more to do with where staff went – and clearly, stayed. Societal and government responses to COVID are in my opinion, primarily to blame for the largest impact on staff disengagement from direct care environments. Dissecting the policy side is a topic for another post on another day. The recruitment strategy post can be found here: https://wp.me/ptUlY-vj
The opposite of recruitment is retention. Arguably, the better an organization does at retaining its employees, the less it needs to invest in recruitment. Healthcare has notoriously been an industry prone to turnover, especially among para and non-professional staff. Back in the day (I sound like a codger), I knew some long-term CNAs, ten to even thirty years in one company (one I was running at the time) and similar for housekeepers, laundry staff and maintenance. I simply don’t see that kind of tenure any longer, save a few of the folk almost at retirement. Once the final generational shift occurs, primarily the folk in my age cohort (aka “Boomers”), new outlooks on longevity in one career and one employer become fully operable. Simply, length of service regardless of retention strategy will be shorter. Long-term may evolve to any service in one place between 5 to 10 years. Outliers will be those working in the same place for ten plus years, without a shift in position or level within the organization (e.g., move to management or some other promotion).
Combatting turnover is a function of understanding why people leave, voluntarily. Some of the primary conditions are symptoms of what is going on in the healthcare industry. For example, hours and workload are often cited as primary drivers yet, providers have (often) little choice but to mandate overtime or have folks work short, covering more patients (or cases) than ideal. There is a bit of a circular (dog chasing his/her tail) phenomenon about workload when overall, open positions exist. Staff get tired of working short or covering for call-offs, etc., and thus, turn over. Problem is perpetuated. A somewhat universal list of the top reasons staff leave is below.
- Supervision: Bad managers/supervisors create turnover.
- Recognition: This is different from reward. This is appreciation or acknowledgement of the work being done within the conditions/environment that it is being done in.
- Schedule/Workload: This involves everything from how much patients/cases are on the shift to when shifts change or rotate to length of shifts to weekends to on-call to overtime mandates, etc. Extra hours can sometimes be absorbed without too much difficulty but too often as of late, extra hours are the norm and staff burnout.
- Limited Promotion/Growth: Healthcare is very layered and often, the jobs stagnate. For example, lateral movement is difficult at a professional level. RNs in one area can’t always jump to another clinical area without additional training or without taking a back-step in schedules, etc. If the view is that the only promotion is to management, a couple of realities need to be considered. First, not all (or even most) clinical staff make good management/supervisory staff. The industry definitely does not need more weak managers. Second, taking good clinicians away from patient care is self-defeating to the organization and to the patient.
- Bureaucracy/Regulation: This I’ll call paper before patients. Healthcare as I often hear, is neither fun nor rewarding in the way it used to be. Too much regulation takes the clinicians who went into the industry away from patient relationships. Staff have tons of work to do and on top, supervisors crab constantly about keeping paperwork up to date (documentation). Meetings and in-services are constant and rarely, of any value (per staff). Don’t forget too, the industry lost untold numbers due to COVID mandates (vaccine, PPE, testing) that created massive burnout and frustration.
In a recent survey of post-acute and senior housing executives conducted by NIC (National Investment Center) only 30% of organizations noted retention of 80% of their new hires longer than a month. A year ago, this number was 46%. When looking out a year, only 7% of organizations retained more than 80% of their new hires for more than a year. I can only think of one word to describe this data – YIKES!
No magic bullets are available to remedy this issue. Turnover has lots of causes and organizations can only do so much. We have a supply problem in the industry and until the supply is increased, by societal value shifts and proper public policy, turnover will continue to be an issue. I do, however, know organizations that have made an impact and with the implementation of certain strategies, performed better in terms of turnover. These strategies comprise my top five tips/recommendations for improving staff retention.
- IMPROVE MANAGEMENT: This is not easy, but it does immediately and over the longer term, bear real results. Staff don’t work for companies; they work for leaders. Hire leaders that have proven track records in building teams and retaining staff. Don’t promote people without a prior, successful training program in management/supervision. Provide ongoing training in management and supervision.
- RELEASE AS MUCH CONTROL AS POSSIBLE OF THE SCHEDULE: Give staff say in what hours they work, when they work, etc. Of course, parameters are required but if any one major gripe can be alleviated, scheduling is a prime complaint. Staff need to be engaged directly and provided opportunity to address their own work /life balance. Team scheduling is awesome as are incentives around team performance in this regard. Likewise, stop thinking about shifts and how many staff per patient. Look at work blocks and patient needs and when duties really need to be done and by whom.
- RESTRUCTURE REWARD AND COMP: To the extent possible, flex everything and create for new staff, a very stepped process of achieving ongoing rewards/increases in pay and certain benefits like time-off, during that first year. Gainshare as much as possible as well. This is not about pay per se but about recognition and engagement. Everything needs to be on the table. Start with the total comp budget and note, “what’s the best way to spend it” – ROI v. wages and benefits. The more staff feel connected such that what they do correlates to a reward, a benefit or recognition to them (individual and team), the more they are likely to stay.
- ALGEBRA/SIMPLIFY: For decades, I have worked with and led organizations in healthcare that simply can’t stop themselves from doing dumb things. Often, the excuse is “regulation”. My answer: B.S. Rarely is all of the paperwork, forms, redundancy, etc., required or if it is, it can be simplified. Healthcare loves paper, regulations, rules, etc. Staff get trapped here and supervisors use bureaucracy like a hammer – a blunt instrument. My advice, deconstruct. Remove as much needless and redundant chores, paper, etc. from staff. Look acutely at who has to do what by when and then, look at how it is currently being done. Improvement is definitely possible. Pay very close attention to how much additional, non-nursing work nurses and nursing staff are doing.
- INJECT FUN INTO WORK: Healthcare is too serious and too bureaucratic. Give staff a chance to create an environment that encourages team, fun, fellowship. This is within the workplace and outside of work as well. The reality is that staff that feel part of something bigger, committed to each other, enjoy being part of a cause, etc., work harder and stay longer at their place of employment. This requires a culture shift for most healthcare organizations and a definite shift in management style.
SNFs and HHAs: A Common, Concerning Trend
Current economic and government policy conditions have converged to create a concerning trend for home health and SNF providers. The trend for both segments is loosely known as “referral rejection”. The number of referrals that both provider types are rejecting is up considerably since the start of the pandemic and for now, I see no change in direction.
The chart above is a snapshot of the issue across the predominant pandemic periods of 2020 through January 2022. One would expect referral rejections to escalate during this period as outbreaks would necessitate, caution and temporary admission holds, especially for SNFs. Yet, even without a winter breakout of COVID, rejection rates in home health increased to 76% for January 2023. Interesting, during this same period SNF referrals increased by 113%. During the pandemic, the referral lines/patterns crossed as home health from hospital referrals increased and SNF referrals, dipped. COVID period hospitalizations also changed and therefore, overall post-acute discharge volumes during 2020 – 2022 dropped. An in-depth look at hospital volumes and discharge patterns is here: COVID-FFS-Claims-Analysis-Chartbook_2022Q1
SNFs are now garnering more referrals at the expense of home health yet, we are seeing shifted patterns around a number of factors. COVID policy and Medicare policy during the height of the pandemic created a preferential shift from SNF to home and hospital admissions (non-COVID related) were down substantially (elective and other procedures). As hospital admission patterns are recovered to near pre-pandemic levels, discharges have shifted to SNFs, not due to a preferential change but due to policy (reimbursement) and staffing.
Though both provider types share staffing and reimbursement concerns, home health has had the biggest negative impacts from the two. SNFs have certain economies of scale in terms of staffing whereas, home health typically, cannot maximize efficiencies with a caseload spread among various locations. In some instances, smaller caseload blocks are possible but in rural and suburban areas, cases are typically spread such that productivity for therapists and nurses is hampered by travel times. Home Health received a pittance of an increase in their PDGM rates for 2023 and CMS is targeting potential reductions going forward to offset programmatic growth and what it believes, is a rich fee schedule for providers.
Acuity on discharge is also up and thus, home health rejection rates seem to correlate. While home health may remain the preferred discharge location for Med Advantage plans and physicians (and patients), finding an agency that can staff the case let alone deal with a higher acuity patient is problematic in most markets. SNFs tend then, to be the beneficiary of the home health rejection.
One thing is certain in the current environment, the 2o ton gorilla in the room is staffing levels – ability to have sufficient number in sufficient roles (RNs, LPNs, CNAs, etc.) to meet patient needs on referral. Similarly, restrictive Medicare rate increases, with staffing costs rising and costs of doing business the same (insurance, supplies, energy), SNFs and HHAs will both be vigilant on patient needs vis a vis, reimbursement. Small margins can quickly get eaten-up by higher wage cost, agency staff, and patient care supply requirements.
As we approach mid-year, I’ll continue to watch this referral trend and how it manifests in terms of rejections and ultimately, care access. I’m afraid that continuation of these patterns will cause access problems if not for post-acute care services in general, but for preferred care locations (home v. facility based). And while it may be nice for SNFs to see a rebound in referrals, I don’t know too many SNFs these days that are able to occupy full capacity (staffing) and to accept without condition, every referral that comes their way.
In-Depth: CCRCs First Quarter 2023
The smallest distinct segment of senior housing is Life Plan communities or CCRCs. Assisted Living, Independent Living and Skilled nursing, in each segment, dwarf the number of CCRCs yet, CCRC popularity remains and continues to grow, if ever so slowly.
CCRCs run a gamut between large and small, entry fee to rental, with/without SNFs yet always including some extended care services beyond the housing component. In recent years, I’ve watch CCRCs smartly, expand their service offerings to include home health and personal care, hospice in some cases, and other wellness and medical/care services. Typically, the larger the CCRC or sponsoring organization, the greater the service array (home health, personal care, etc.).
The industry remains dominated by non-profit owner/operators. For profit organizations account for about 25% of the industry, the balance is thus, non-profit. Size as measured by units/residency is largest among non-profits. Additionally, the non-profits dominate the entry-fee CCRC market.
For the last two plus years, COVID has had a profound impact on all senior housing organizations. The fallouts from the pandemic include a diminished workforce (fewer health care and support) workers, inflation, and rising interest rates have hurt all providers and driven all kinds of compensating behaviors such as reducing census due to staff shortages, escalatory pricing, service reductions, etc. CCRCs have not been immune to the pandemic fallouts but have weathered the pandemic and the fallouts better than their segment partners (e.g., Assisted Living and SNF). Similarly, we watched CCRCs experience fewer COVID health impacts (outbreaks, deaths, etc.) than Assisted Living or SNFs.
Through the first quarter of 2023, CCRCs have experienced a steady but slow increase in occupancy. At the start of the quarter, occupancy was still behind pre-pandemic levels at 87% (compared to 91% pre-pandemic). Non-profit CCRCs had stronger occupancy performance than their for-profit counterparts – 88% v. 84% respectively. We also see entry-fee communities outperforming rental communities, 89% to 84%.
In terms of rate and inventory, there has been a shift from pre-pandemic levels. Inventory (units for rent) shifted the least for non-profits and where reductions occurred, they did so in nursing care. For-profits had the biggest inventory shifts, across all living accommodations (independent, assisted and nursing). Rent increases are harder to factor but as occupancy has recovered, inflation and labor factors settle-in, we are seeing rather aggressive pricing shifts. Senior Living in general has seen rate increases in the range of 8 to 10%. Diving into living segments, we see memory care and smaller Independent Living units (one bedroom, studios) increasing the most – 9% to 10% – with studios running at 8% plus, the same as Assisted Living. CCRCs tend to have different pricing packages at the Independent Living level vs. at the care levels. Many incorporate various discounts for residents as they transition to the numbers of actual realized rent v. published or asking rent can be quite different (Sources: NIC, LivingPath.com)
As 2023 progresses, there are a number of headwinds for CCRCs still trying to recover from the pandemic and its related fallouts and impacts. Below is my watchlist for the remainder of the year. I’ll touch base on these items from time to time throughout the remainder of the year.
- Interest rate rises will impact cost and access to capital for CCRCs. These organizations tend to be capital intensive as their marketability is tied to heavily amenitized environments requiring constant updates, improvements, refreshment, etc.
- Rising rates have also severely impacted the residential real estate market. New CCRC occupants typically move post a primary home sale. The inability to effectively liquidate their real estate to pay an entry fee will harm occupancy increases. Most CCRCs have units for sale. Depending on the market location, this impact could be very, very profound for the balance of 2023 and perhaps, beyond. The good news is that homes for sale inventory is low so price reductions have not been (yet) dramatic.
- A marketing strategy often deployed by CCRCs is some form of rent suppression, rent reduction or abatement for a period of time to “sell” a unit. Revenues are already suppressed due to lower occupancy and, likely rent suppression in general during COVID. Revenue recovery will be a function of occupancy and the ability to increase rates to accommodate rising costs. This will be a tricky navigation for most operators/sponsors for 2023 and in my view, early 2024 as well.
- Labor will continue to be a major problem hampering occupancy, service expansion, and increasing cost. I don’t see any labor challenge abatement any time soon, beyond 2023.
- In established CCRCs we will continue to see an increase in resident age and debility and a similar trend on admission. This trend, especially on admission, is a lingering pandemic problem as folks avoided moving to CCRCs during the pandemic. As they do now, they are generally older and more disabled.
- Wealth reduction due to market losses will cause some seniors to remain, ill-advised, at home. Couple the liquidity issue (stagnant) on real estate sales (bad market) and estate shrinkage due to investment losses, an impact in qualified seniors for any CCRC but especially, entry fee CCRCs, has occurred. Recovery will not occur in 2023.
- The demand for CCRCs is very elastic such that, there are a number of substitute options available to a senior, such as staying at home with services. As real estate liquidity is a challenge now, the demand curve has shifted a bit similar to what we saw in 2008 to 2010. Expect this shift to remain in-place for at least all of 2023 and likely, until mid 2024.
Top 5 Tips for Recruiting in a Tough Labor Market
I’ve done a number of presentations on the staffing challenges facing providers and how, certain strategies work and others don’t in terms of recruitment and retention. Over my 30 plus years in the industry, I’ve had reasonable (ok, very good) success in building and retaining high-performing teams, including direct care staff. I’ve been fortunate to have many folks who have worked with me, follow me from assignment to assignment, some across the country. Leadership is no doubt key to recruiting successfully as people want to work with winning organizations. Likewise, really good recruiting strategies don’t use the same methodology as the past – namely advertise, incent (throw money at it), repeat. Steve Jobs said it best: “Innovation is the only way to win”.
Most healthcare providers can’t financially compete for staff, consistently. In reality though, staff only work for money when they see no long-term value in the employment proposition. I know travel nursing and agency nursing catch lots of news and sound sexy and high paying. I also know nurses (really, really well as the same are throughout my family) and, the lure of travel nursing is short, regardless of the money. Stability, home base, regularity, working with good colleagues and peers has more value to most nurses.
Before I offer my five “DOs” for recruiting, let me offer a few “DON’Ts” and a reminder. The reminder is recruiting is like marketing – it requires constant, incremental effort to achieve success. Superb marketing campaigns and brands build year-over-year. One misstep, however, can damage a brand significantly (see Bud Light). The “don’ts” mostly focus on money as in don’t think you can buy staff and don’t think, sign-on bonuses buy anything other than applications and temporary workers. Don’t focus on the economic alone but on the goal of recruiting. Like marketing, it’s about positioning the organization to attract workers. The sale or close comes via an H.R. specialist or someone exceedingly good in the organization of convincing people of the value of working for the organization.
My Top 5 tips for recruiting are….
- Focus on recruiting introductory, PRN workers first. Stop advertising for shifts, full-time, part-time, etc. Focus on people who are interested in flexible work and are willing to take a role and see how it goes. This is the “dip your toe in the water” insight. Be prepared to pay well but not necessarily crazy. You won’t be dealing with many if any benefits for this group other than some soft stuff (meals perhaps, incentive rewards like a gift card now and then, t-shirts) so hourly rates can be decent. Likewise, be prepared to pay weekly if not even more frequently.
- Have a killer, multi-media/onboarding/orientation program. Little investment here but not much. YouTube, Tik Tok (can’t believe I wrote that), a website, and other applications can be used to recruit (what it’s like to work for us) and to onboard and orient. The more new staff, even your PRN, feel comfortable walking in the door, the easier it will be to get them and keep them. Giving them a stack of policies and procedures, a big manual, a drone-on HR speaker or a computer-based checklist is a certain turnoff.
- Give the Bonus to the Staff. Turn your own staff into recruiters and pay them for it. Nurses know nurses, CNAs know CNAs, etc. Comp and incent them to bring referrals and comp them well. Sign-on bonuses really don’t work but referral bonuses do. Heck, do individual and team and create a bit of competition and fun.
- Create a Marketing Campaign and Have Accountability. Recruiting is marketing. Stop thinking otherwise. Sure, many think it’s an HR function but most who do, are wrong. It’s an organization function today requiring the best talent. For people to join your organization as employees, they need to know “why” – what are the tangibles and intangibles. Why should I work for you? This is not about pay and benefits but about the value and benefit internally, of a person working for XYZ organization. What’s the value proposition? What’s the real reason people work and stay for an organization (trust me, it’s not money). Build the case and sell that case.
- Get out of your own way. I watch organizations fail as their message is all wrong – tired, non-descript, sounding like everyone else. I watch organizations fail as their environment and their culture are all the same. Stop and align the incentives. Reward what matters and differentiate. Remember the Jobs quote in the first paragraph. Innovate. Stop looking externally at what everyone else is doing and stop going to the same conference sessions. Direct care staffing has certain red rules but not as many as providers think. In other words, stop the “can’t, regulations won’t let us” and start with WHAT can we do. Maybe even bend a rule or two if the same doesn’t jeopardize patient care or quality. Worklife for nurses and CNAs in terms of direct care has lots of negatives but many that I see are driven by provider foolishness – too much paperwork not necessary, too many meetings not necessary, and very few positive touches and rewards. If your culture and the work create fun, ownership, and staff love their work and their company, recruiting others to join the team just got that much easier.
Upcoming, I’ll touch on the opposite of recruiting – retention.
Friday Feature: Nursing and LTC
Each Friday (hopefully so), I will take a specific topic that has been in the news or been directly posed to me by a colleague or a reader and do a bit of a deep dive feature. This week it’s the future of nursing or more directly, nurses in senior housing and long-term care.
As I’ve discussed in other posts and in presentations I have done, the U.S. post the pandemic has a major nurse shortage – RNs and LPNs. The shortage is most noticeable at the bedside, hospitals and SNFs standing out. This is not to say that home health and hospice are immune from short numbers, but the most acute demand/supply contrast is found in inpatient settings. This shortage creates care problems and access problems. The typical admission/discharge cycles among providers are constantly interrupted such that patients are often stuck in one element or another of a care queue simply because not enough staff are available to provide care. I’ve seen all too many times over the past two years, SNFs not accept discharges, even of their own transfers, simply because staffing is inadequate in number to provide the care required.
To anyone watching prior to the pandemic, the shortage problem has been building. The pandemic exacerbated what was already a modest imbalance (more demand than supply). For various reasons from safety to mandates to burnout, COVID pushed retirement numbers for nurses and/or, created a disengagement from inpatient settings to other settings where nurses could work in a more even-keel environment, less taxing. Clinic settings, schools, software companies, lab companies, insurance companies, etc., all consume nurses, especially RNs. While the wage trade-off may be a few bucks or so per hour, the stability and scale of Monday-Friday, days only even some with full remote work, pulled nurses away from hospitals and SNFs.
The demographics in terms of age illustrate nursing to be an older profession. In other words, the nurses working are more seasoned in years than compared to other professions. Younger people are not entering the profession with the same pace of say, twenty or thirty years ago. Too many other alternative professions exist and the “care” calling just doesn’t appear to be as strong as it once was. I also know too many nurses of parent-age or slightly older that no longer advocate for their children or grandchildren to enter nursing. Being in a family of nurses (my mom, my aunt, my wife, my daughter, etc.), nursing was almost the family profession in some regards and thought highly of as a noble calling and a great career. Here’s a quick snapshot at the demographics, albeit a couple of years old: https://www.ncsbn.org/research/recent-research/workforce.page
A recent report from the National Council of the State Boards of Nursing highlights the negative trend of supply in nursing. The report illustrates a major forward problem in terms of the supply of nurses. According to this report, 100,000 nurses left the workforce during the pandemic. Of a total workforce of 4.5 million nurses, 900,000 are projected to leave the profession by 2027 – four years from now. What’s most concerning is the profession negativity among nurses with less than 10 years of experience. This lack of regard and dissatisfaction with the profession spills over into their cohorts/peer groups, painting nursing as a less than desirable career.
Image and positivity among professionals within any vocation is a key recruitment and retention factor. For a parallel, look at what has happened to police officers and law enforcement. The negativity and disdain for policing that has occurred over the past three years primarily, has driven large numbers of officers away from police work. Concurrently, recruiting new officer candidates has become a major challenge. Nursing is seeing a similar, though not as pronounced, trend. The report and data observation is here: https://www.ncsbn.org/news/ncsbn-research-projects-significant-nursing-workforce-shortages-and-crisis
Digging a bit deeper, I looked specifically at senior living and long-term care. While most other health care sectors have recovered for the most part, hospital and senior living, direct care have continued to struggle. Long-term care bedside nursing has struggled to recover the most, not that it was super staff healthy prior to the pandemic. According to the American Health Care Association (AHCA), an industry trade association, long-term care is 400,000 workers short of demand and the rate is climbing. Per AHCA, 90% of SNFs report being understaffed, 50% severely understaffed, and 98% report hiring is problematic. The result of this staffing crisis is 60% of facilities are reducing census due to lack of staff. A study from the University of California, San Francisco projects that the long-term care/senior living industry will be short 2.5 million workers by 2030. NOTE: CMS and the Biden Administration are proceeding on developing required, mandatory staffing levels in SNFs, in spite of this information. The reference article is here: https://qz.com/no-one-wants-to-work-in-american-nursing-homes-after-co-1849446021
What we can glean from literature, nursing professional organizations, nursing unions, and providers is a rather bleak picture of an industry problem that seems to be getting worse, not better. Fixes will require a whole of industry, profession and government approach. Policy makers are definitely going to have to develop a different mindset regarding the work of nurses in nursing homes and how overbearing regulations and enforcement actions don’t improve patient care but do drive nurses from the industry. Listening and reading, what nurses say about why they won’t work in LTC or are leaving their LTC jobs is summarized below.
- Working conditions – short staffed, short supplies, outdated equipment and environments
- Pay and benefits not par with other nursing jobs
- Turnover, especially management
- Bad management
- Paperwork burden
- Negative surveyors and regulations – focus on paper compliance, not patient care
- Mandatory overtime
- Lack of support systems internally
- Lack of training
- Difficult patients and families – unrealistic about care demands
- Negativity of the industry.
Solutions? My vantage point encompassing thirty plus years in health care and senior living says we nationally, need a two-prong approach. First, we need to ramp supply. Make nursing a cool and rewarding profession and easy and inexpensive or free to become a nurse. Second, obliterate the foolish impediments to job satisfaction for nurses. Reimbursement in LTC is atrociously low and unable to seriously sustain needed environmental updates and improve comp opportunities for nurses. Pay is not the sole issue, but it is an issue. Likewise, regulations and heavy-handed enforcement is anathema to attracting and retaining good nurses and especially, good nursing leaders. I lost track of how many RN managers and Directors of Nursing I know that have left their jobs because of regulatory foolishness, inept surveyors, and illogical citations. Paper compliance and the amount of time devoted to the same versus patient care is a huge dissatisfier and an equally huge trigger to exit long-term care. A final reference: https://www.ahcancal.org/News-and-Communications/Press-Releases/Pages/Data-Show-Nursing-Homes-Continue-to-Experience-Worst-Job-Loss-Of-Any-Health-Care-Sector.aspx
TGIF!
Merge/Affiliation in the Cards?
I pay close attention to economic trends and to the health care industry in general, as the same are applicable. One trend I’m watching quite closely is business consolidation and mergers/affiliations. In the general economy, a lot of consolidation is occurring post-pandemic. Restaurants are closing outlets (Red Lobster, Krispy Kreme, Burger King, etc.), retail outlets too like Bed Bath and Beyond and even, Wal Mart are closing stores in various locations. The drivers? Simplistically, supply chain issues (increased costs and inability to pass along the same via price) and labor costs plus worker shortage. There is another driver in some closures and that is environment as restaurants and retailers are leaving communities with high-crime and homelessness as they simply cannot generate a sustainable retail climate amidst theft (inventory loss), customer erosion (customers staying away from certain locations, etc.). Whole Foods leaving San Francisco is an example.
Health care and senior living/housing are not immune to these same pressures. Labor is a huge issue facing all providers today. Changing environment, particularly for urban providers is an issue. Supply chain issues and supply costs are additional motivators or drivers. And let’s not forget the impact of COVID (yet to totally abate in health care and senior living) and increasing regulatory costs. Below are some examples of consolidation and affiliation moves that I have seen recently.
- Diversified Healthcare Trust (REIT) merging with Office Properties Income Trust. This is really an access to capital play as Diversified is constrained from refinancing debt due to covenants. It has a pretty large capital need to improve its senior living facilities (primarily IL, AL and CCRC). Like most REITs with senior living holdings, the occupancy levels remain below targets/desired levels.
- Good Samaritan Lutheran/Sanford is offloading a large amount of skilled nursing facilities and other senior living centers across 15 states (primarily western states). Good Samaritan was the second largest chain provider of senior living.
- Sanford, which merged with Good Samaritan, is in the process of affiliating with Fairview Health. Fairview includes Ebenezer (senior living) which, is the largest non-profit manager of senior living projects in the country.
- Theda Care health system in Appleton, WI announces an affiliation plan with Froedtert/Medical College of Wisconsin health system. The two, primarily hospital and clinic-based organizations will offer services along with locations throughout the eastern corridor of WI, primarily Milwaukee metro area and the Fox Valley area (Appleton and Green Bay as the metro reference).
Looking at the press releases and then, reading other disclosure information and knowing players in each of these scenarios, a similar series of factors are driving the affiliation/merger/consolidation activity. Not surprising, these factors are not unique to health care/senior living. They are the same factors in many cases, driving decisions across all businesses/industries.
- Labor availability and cost. Affiliations and outlet reductions reduces labor cost and vulnerability to staff shortages.
- Stagnant volumes and revenue shortfalls. Senior living is not back to pre-pandemic occupancy levels and frankly, while the trend is improving, it could be a while before we see pre-pandemic occupancy levels.
- In the case of senior living, further movement toward home and community-based care options is eroding demand. This means, provider capacity is impacted. Closing outlets or selling them to more localized providers such as the case with Good Samaritan, make sense. Local providers have inherent market advantages that large, national or regional players simply don’t have.
- Supply chain improvements are possible with a larger platform though by experience, they are not as large and impactful as often forecasted. Single-source buying is good and can achieve discounts but often, the reliance on one source may challenge quality targets and innovation. I’ve seen this definitely occur with food and food service supplies.
- Overhead reduction is the biggest gain or biggest possible gain. Reducing management layers and consolidating overhead functions can cut millions of dollars of duplicative positions. In really good mergers/affiliations, bureaucracy is also reduced netting more efficiency and better care/service. This however, comes over time.
- Access to capital can improve as scale improves. In other words, larger organizations have more opportunities and outlets to raise capital when needed, especially if the scale achieved is margin positive.
- Increased market share and increased market opportunities can occur. For example, in the case of the Theda Care and Froedtert affiliation (if it closes), both systems get access to new markets via their affiliation and new customers without having to “build new” or “start new”. New building and starting new locations/outlets is expensive and time consuming. Leveraging the business footprint with a synergistic partnership is much faster and in theory, less expensive.
More mergers/affiliations to come? No doubt. While the economy is moving toward a recession and labor remains challenging, providers will have to look toward possible strategic opportunities that include adding services, becoming more efficient, building/improving capital access, and accommodating rising costs without concurrent increases in reimbursement or additional rate. Affiliations make sense for some providers, especially when selling is not a real or viable option (non-profits).
I’ll provide a merger/affiliation strategy document/post soon!
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