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More Tough Love: Why nursing home closures

More Tough Love: Why nursing home closures May 9, 2019

Marketing, research and business development consultant in healthcare, human services and senior living.

closed sign on front door

It’s time for some more “tough love” about nursing home closures.closed sign on front door

Recent articles in Skilled Nursing News, McKnight’s Long Term Care News and even The New York Times have decried the closure of nursing homes. The focus of these articles has been on the social impacts, (disruption of families) and the economic effects (loss of jobs). All of this is inarguable. However, another theme running through several of these articles is the suggestion – even the outright claim – that state Medicaid agencies and Medicaid payments themselves are to blame for these closures.

This is just not true. The story behind nursing home closures goes back to the 1980s. The reasons nursing homes close has less to do with Medicaid rates, and are more related to the size of the market, the unattractiveness of the product itself and the bizarre cross-subsidization by Medicare. Increasing labor costs have contributed to the problem, but these are not the root cause. If frontline workers’ wages were adjusted in many marketplace areas, many nursing homes would still not be able to survive.

The reasons are clear and have been conveniently ignored or looked past for three decades.

Size of the Market: Waiting for the silver tsunami

Very often in the popular press, and even in trade publications, evidence for nursing home demand is reported as the number of people turning age 65.

Demographic Dip 1925 - 1945
Demographics – Live Births US

Certainly, the leading edge of baby-boom generation are crossing this imaginary threshold. However, this does not signal increasing demand. The average age of admission to a nursing home is roughly 87 years. Instead of looking at the 65+ population, a more nuanced and critically important analysis of the 85+ population shows that this age cohort has actually been shrinking in most marketplace areas. As a percent of the population, or as a self-referent percentage increase (year-over-year increase), the numbers are impressive. The 85+ age cohort, year-over-year is increasing, and the size of the cohort as a ratio, compared to the general population is also increasing. However, as Benjamin Disraeli famously said, “There’s lies, damn lies and then there’s statistics.” As a percent, the 85+ cohort may be growing, but in most marketplace areas as a number it is declining. The reason for this isn’t declining survival (this is improving); it is because from 1925 to 1945 most locations in the United States experienced a decline in live births due to both the Great Depression and the dustbowl. Just ahead of the projected increase in the number of the 85+ population (~2031) we are experiencing a decline in the size of the so-called age qualified population. This so-called “demographic dip” or “birth dearth” is real and is having an impact on the scale of demand for seniors housing and services of all types. Careful analysis of most marketplace areas will show this pattern of demand.

So, you can wait for the silver tsunami, but it’s a long wait.

What Condition Your Condition Is in

Kenny Rogers famously sang, “I just checked in to see what condition my condition was in.” If Kenny checked most SNFs, he would find their condition is deplorable. The principle portion of nursing homes in the United States were built between 1965 and 1985, and certainly since the Balanced Budget Act 1997, there have been very few new nursing centers built, and capital investment and refurbishment has lagged well behind any industry standard. (Can you imagine staying at the Hilton that was built in 1965 and has had no significant capital improvements since? You get the picture.) Meanwhile, beginning in the early 1990s, a new, more flexible inventory of age-targeted congregate housing has been developing. Assisted living, or purpose-built independent living has absorbed almost all the age-qualified demand in the upper income tiers in many marketplace areas. Historically, nursing centers had used so-called private pay patients to cross-subsidize the means-tested Medicaid beneficiaries who were residents. But with the development of attractive, purpose built assisted living residences in many marketplace areas, well-to-do seniors, and or their well-to-do adult children now have an alternate to the all too often grim prospect of months or years in a cinder-block, poorly ventilated, institutional nursing center.

In part because of this, relocation to a nursing home is not only viewed negatively in the society at large but is seen as a fate worse than death. Attempts to counter act this deep negative cultural metaphor has, so far, been unsuccessful.

So, the “problem” isn’t Medicaid it’s the size of the age qualified market, and the deplorable condition of the product. Is there anyone who wakes up in the morning and says, “Great,  I’m moving to a nursing home today!”?

The Medicare Subsidy: Profit seeking

Over half of all nursing home residents nationally are Medicaid beneficiaries, while roughly only 11% are paid for through Medicare. For decades, the small percentage of highly reimbursed “Medicare mix” subsidized the majority of poorly reimbursed Medicaid. This cross-subsidy between government programs was not discussed openly but was widely recognized within the sector as a linchpin of many nursing homes’ financial survival.

Some nursing homes became proficient at profit-seeking through admissions and payment-mix management, and therefore became quite profitable. This attracted capital investment in the real estate at scale, and some of the resulting organizations became quite large. Unfortunately, this investment didn’t include substantial improvements to the infrastructure – the buildings themselves. Refurbishments were not significant; a coat of paint and some new lighting was the extent of the updates. The rest went to pay land-leases and operating profits. This profit-seeking was rational and to be expected. In this context, Medicaid ‘unit losses’ were accepted, and Medicare profits were the driving business goal.

Fast forward to 2010, when the nursing home – Medicare lifeline started to be squeezed by CMS,  as it sought to eliminate waste and control variability in the Medicare program. The result is that both Percentage of population 65+ using SNFutilization of, and payments for Medicare beneficiaries in nursing homes is declining. Draining the Medicare profit from the nursing home pool exposes the underlying economic underpinnings – and they’re quickly rotting.

On the face of it, this “secret” inter-government subsidy with the nursing home in the middle is irrational from an economic, fiscal or, program perspective but as has been said before, “Who knew it was this complicated?” The typical nursing home loses money on every Medicaid patient (and that’s 60%+ of the population) and makes up for these losses by realizing operating margin on every Medicare beneficiary. The declining use of nursing homes as postoperative rehabilitation destinations, and the increase in various managed care organizations, like Medicare Advantage within the Medicare program have reduced both utilization and the program payments.

The net of this is that nursing homes are caught in the middle and have no way to adjust for the losses.

Labor Market Competition

In the United States (and many other developed economies) labor market competition has been heating up for the past 6+ years. This post-recession economic recovery has been the longest on record. The typical result of such tight labor markets is increasing wages. Evidence of this can be seen everywhere – from the Stop & Shop strike to home health workers organizing in New York. In many ways, a nursing center’s ability to compete for front-line workers is hamstrung by lags in regulatory adjustment to wages. Labor rates have historically been set for frontline employees in nursing centers by government reimbursement rates, since 70%+ of nursing home costs is labor. State funded Medicaid payments have been slow to catch up with changes in the labor markets.

Creating a more responsive wage adjustments scheme would help many nursing centers, and may even forestall certain closures, but this alone is a very tentative thread for any nursing center to hold onto. The underlying market forces are running against this segment of the post-acute care sector.

What’s Needed Going Forward

It is evident that nursing homes are an essential component of a comprehensive, rational care delivery system across the United States. Squeezing nursing centers indiscriminately and tolerating their closures is as irrational as the “secret” inter-government cross subsidization (see above).

What’s needed is a rethink of our highly fragmented, dysfunctional patchwork of age-qualified congregate residential, and community-based services; so little of what is now in place makes any sense at all! There is an opportunity – even an obligation – for leaders in the sector to step up and drive a change agenda which acknowledges the realities, while envisioning a collaborative system, encompassing congregate and community-based providers including pharmacy, nursing, the full array of allied health, long-term supports and services, housing and care. These types of models are available.

An appropriate response requires dramatically rethinking the existing Stark regulations, and the tangled skein of regulations that inhibit and, in some cases, render illegal, the needed cooperation between and among providers who must collaborate for the well-being of the targeted populations. This collaboration should include the roles of public health departments and case management professionals. Long-term care professionals didn’t invent public health, although recent discussions about “social determinants of health” would suggest as much. Intermediaries’ incentives to control costs and improve outcomes can be brought to bear here, creating virtuous cycles of collaborative experimentation and evaluation.

The plight of nursing homes is a symptom of market shifts, profit-seeking, and at best neglect, and at worst the abandonment of the aged through fragmentation of the necessary congregate and service needs, and evisceration of our public health systems.

No mysteries here – just a complicated challenge that needs a dramatically new approach.

Marketing, research and business development consultant in healthcare, human services and senior living.

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