December 17, 2018, Alex Spanko & Maggie Flynn, Skilled Nursing News - We’ve made it to the end of 2018, which will likely go down as one of the most eventful years in the history of the long-term and post-acute care industry. Between the first round of Value-Based Purchasing penalties taking effect and the rapid rollout of the Patient-Driven Payment Model (PDPM), it’s probably a safe bet that the executives and administrators of the future will talk about the past year, and the 12 months ahead, in the same tones as OBRA in 1987 and the Prospective Payment System in 1998.
And those were just the banner headlines from the federal government. Several high-profile bankruptcies rocked the industry in 2018, as providers struggled to adapt to the new world of lower reimbursements, Medicare Advantage pressures, and state-level Medicaid rates that frequently don’t cover the cost of care for some of the most vulnerable seniors in the country.
Here at Skilled Nursing News, we’ve spent the last year bringing you the latest news and insights to help you navigate the changes. As editors and reporters, it’s been a fascinating time to cover the industry, and we’re excited to help the industry’s investors, operators, and vendors stay ahead of the curve in the year to come.
Alex Spanko, Assistant Editor
CMS will step up enforcement, look to cut reimbursements
So far, PDPM is the rare massive government regulation with nearly unanimous support from the industry that it’s designed to regulate. Since the new model was rolled out earlier this year, executives from major real estate investment trusts (REITs) and operators have sung its benefits, with a particular focus on the way that it more closely links reimbursement dollars with patient complexity — a key step on the eventual path toward linking cash with outcomes.
Industry leaders have also taken heart in the fact that the Centers for Medicare & Medicaid Services (CMS) decided to increase the Medicare market basket rate by 2.4% for fiscal 2019 — a move that will boost reimbursements across the board — and the budget-neutral nature of the PDPM structure. In theory, at least, CMS will spend no more or less money on skilled therapy reimbursements than it did under the current Resource Utilization Group (RUG) system.
(This, of course, represents a significant walk-back of the industry’s reaction to that 2.4% rate when Congress first floated the market basket increase in February. The consensus had been that the rate would increase by 2.7%, prompting an angry reaction that seemed to temper once the smaller boost went into effect.)
But while providers seem to be focused on the upside of CMS not making any payment cuts under PDPM, the optimism ignores another key truth about a budget-neutral policy change: If the government changes the way providers are reimbursed for key services, but doesn’t adjust the overall faucet of dollars going into the program, there must be winners and losers — and the losers could find themselves out of the industry, given how tight margins already are for providers across the country.
Then there’s the matter of what will happen once CMS officials get their hands on cold, hard data about how providers actually operate under PDPM. Various consultants and operators have identified ways they can boost reimbursements with the new system, either by deliberately taking on more complex patients through the introduction of clinical specialities, or by simply identifying the everyday procedures and services that suddenly have an effect on reimbursements with PDPM.
I could be proven wrong, but it’s highly unlikely that CMS would stand for a scenario in which Medicare spending at skilled nursing facilities actually goes up in fiscal 2020 and beyond as providers learn which strategies can give them an edge. CMS probably won’t be able to adjust rates downward by the end of calendar 2019, with just three months’ worth of data to go on, but I expect Washington to be watching those numbers closely — with an eye toward potential downward adjustments in 2020 and beyond.
Remember, multiple voices have told Skilled Nursing News that when CMS began moving to value-based models such as accountable care organizations (ACOs) and bundled payments, the industry cheered, reasoning that SNFs were a cheaper option than the the hospitals, inpatient rehabilitation facilities (IRFs), and long-term acute care hospitals (LTACs) that represented their competition in marketplaces. And yet today, that shift has directly contributed to many of the headaches — length of stay declines, the rise of home health agencies — that have driven many SNFs to the brink.
Private equity’s influence will grow
The year’s blockbuster deal — Welltower Inc.’s (NYSE: WELL) joint-venture play to snap up the real estate from the bankrupt HCR ManorCare chain, with new operator ProMedica morphing from a regional hospital non-profit to a nationwide powerhouse – came with a lengthy side of private equity bashing.
In justifying the deal to shareholders and the general public, Welltower CEO Tom DeRosa described the flailing ManorCare as a fundamentally sound nursing home operator that had been unfairly pillaged by investment giant The Carlyle Group, its private equity owners since 2007. Driven by a desire to generate as much cash as possible, Carlyle deferred key maintenance on ManorCare’s aging physical plants, DeRosa asserted, putting the SNF behemoth at a competitive disadvantage and contributing to its precipitous fall into lease default and eventual Chapter 11 bankruptcy protection.
But not all private equity firms are created equal, and 2018 saw a significant infusion of non-REIT, non-bank capital into the skilled nursing space. These players look at the demographic trends in the United States and salivate, dreaming of the day when the baby boomers start hitting their mid-80s en masse and require the kinds of skilled care that independent and assisted living simply can’t provide.
Of course, that logic comes with its own set of flaws — see my next prediction for more on how I feel on that — but private equity investment has a distinct set of advantages as skilled nursing moves into the post-PDPM world amid a greying America. For one, C-suite executives of private equity firms don’t have to release quarterly results to the general public and open themselves up to questioning from reporters and analysts every time occupancy dips or revenues fail to meet targets over a three-month span. That’s a huge advantage in a sector where success is measured in stability over the course of years, not quarters — and where the final product is care for vulnerable elders, not consumer products or building materials.
What’s more, the best private equity firms can adapt to the changes much more quickly than a REIT or a bank. Earlier this month, a VP at a PE-owned skilled nursing facility told me how administrators can receive approval for new equipment or programs within days, not weeks or months — an advantage that can’t be overstated when market conditions, regulations, and census can change on the fly.
That said, DeRosa had a point about Carlyle and ManorCare: Big private equity firms can’t just jump into the nursing facility business and run it the way they would an office supply retailer or a fast-food chain, or see it as a cash cow to milk and then walk away. But the smart, nimble investors who believe in the care model, install knowledgeable operators with a mission, and then let their field leaders make the necessary decisions can and will find success in 2019 and beyond.
Smart providers stop looking to the ‘tsunami’ for salvation
Anyone who’s been interviewed for a Skilled Nursing News story knows that it’s a question I enjoy dropping into the end of conversations, even if the topic didn’t exactly come up: When do you think the silver tsunami, that long-promised glut of seniors who will need senior housing and care, will hit?
I generally use it as a litmus test to gauge a person’s optimism about the coming years, but I also ask because I’m genuinely curious: Everyone’s talking about the demographic wave as inevitable, but everyone has a different answer of when it’ll strike, and being right or wrong could have a significant financial impact for operators and investors alike.
If there’s one frequent good answer to the question, it’s: “I think [insert year here], but we’re not counting on it as an organization.”
It might be tempting for analysts and investors — including the players in the PE space who look at the projections and see dollar signs — to think of the skilled nursing industry in 2019 as a high-powered offense in final minute of a tie football game, stuck back at its own 10 yard line. Sure, you could take a risk with a deep ball, but why not just take a knee, let the clock run down to zero, and try your luck in the overtime period, when the playing field could look that much more favorable?
This analysis misses a core truth about the industry today: Operators and investors are closer to their opponents’ end zone than they may realize. It might take a quick, on-the-fly reimagining of the playbook — with a greater emphasis on speech therapy, cardiac residents, or ventilator care, depending on the particular market — but providers have a shot to see real benefits with the demographic makeup the way it is today.
The “silver tsunami,” whenever it arrives in skilled nursing, will certainly be the proverbial rising tide that lifts all boats. But sitting back and waiting for some far-off influx of patients represents a serious missed opportunity for providers of all sizes and specialities.
Maggie Flynn, Reporter
Providers diversify beyond traditional skilled nursing
The population may be aging, as Alex notes above, but with median operating margins of zero, SNFs cannot afford to wait for a wave of graying baby boomers to save them from occupancy levels that fell almost continuously throughout 2018. Even as demand for more specialized services rises, SNFs are facing intense pressure from payers and providers to reduce lengths of stay, which means patient turnover will keep increasing.
As a result, more providers will start to add services other than skilled nursing.
For some operators, this will take the form of adding home health and care. One advantage this will bring for SNFs: widening the pool of people with whom they come in contact. While not all the people who need this care will eventually require skilled care, the increased reach will mean that the SNF is more likely to connect with those people who do need it.
Other providers will look at their experience in dealing with a population with rising levels of psychiatric issues and branch out into the realm of behavioral services. For some, this will include expanding their patient pool by taking on people who have medical issues stemming from substance misuse disorders. Others might take advantage of state programs that provide additional reimbursement and benefits for taking on behavioral patients who need skilled services.
Still other providers will look to add additional types of services inside and outside their buildings, such as assisted living, adult day care offerings, or even meal services. Others might target patient populations that prove troublesome for hospitals to place, whether that’s because of the patient’s background or specific medical condition.
Whether they decide to move into other parts of the community or other parts of the health care continuum, more SNFs will be looking to branch out.
Distress and upheaval will continue in the sector
And companies that didn’t declare Chapter 11 bankruptcy still underwent major difficulties: Signature Healthcare had to restructure leases with its major landlords and settle a Department of Justice lawsuit to the tune of $30 million. In fact, CEO Joe Steier told Louisville Business First that the company almost failed because of several financial headwinds.
Another major operator, Genesis Healthcare (NYSE: GEN), faced an entire year of losses and had its operating model repeatedly called into question, after a 2017 that saw the Kennett Square, Pa.-based operator get a delisting warning from the New York Stock Exchange and grapple with a major restructuring of its leases with its top landlords.
It’s not likely to get calmer for operators this year. While much of the industry is optimistic about PDPM, the new system is going to dramatically alter the kinds of patients providers are incentivized to take, and the coding and specialty requirements SNFs have to have on hand. As a result, many small SNF providers with one or two facilities will decide they’ve had enough. Indeed, some have already decided just that, according to Mark Lamb, the chief investment officer at San Clemente, Calif.-based CareTrust REIT (Nasdaq: CTRE).
PDPM is also going to upend the third-party rehabilitation industry, as SNFs start looking at it as a cost center rather than a driver of reimbursement. Rehab providers will have to navigate how to offer value in a world where their services don’t drive money toward SNFs in the way they did under the old payment system. SNFs will have to grapple with meeting patients’ rehab demands and expectations while not losing even more money in the process. Winners — and losers — will start to emerge in both industries.
SNFs will look at each other as partners
The idea of SNFs working together, rather than seeing each other as competitors, has been hovering in the background of multiple presentations, conferences, and interviews with the SNN team. At LeadingAge’s national conference in Philadelphia and the National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in Dallas, for instance, speakers on several panels made mention of SNFs in various regions banding together, while consultants have casually noted in interviews that facilities are collaborating to pool their strengths and have resources in a variety of specialties.
The practice may still be in its nascent stages, and the success of such efforts still uncertain. But PDPM will only strengthen the incentives for providers to start working together if they decide to exit the business entirely, at least according to one M&A expert.
This also could hold true for SNFs on the operations front if they decide to remain in the business. As providers face pressure to specialize and increase their clinical competencies, they’ll find benefit in checking in with their peers on best practices. As hospitals and health systems continue to consolidate, SNFs could find it useful to band together when negotiating with their referrers. As PDPM winnows the number of SNFs in existence, the ones still in the industry can increase their regional clout by presenting a united front to everyone from payors to legislators.
And as the health care system lurches toward paying for value and outcomes, collaboration among all providers — including those who used to compete against each other — will become essential.