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Zombie Nursing Homes: Too important to fail?

Zombie Nursing Homes: Too important to fail? June 8, 2021
Zombie Nursing Homes

Zombie nursing homes are at large in the US, although we haven’t yet acknowledged them.

These are nursingZombie Nursing Homes homes that have enough money to scrape by, but not enough to re-invest or withstand an economic shock.

According to Investopedia:

Zombies are companies that earn just enough money to continue operating and service debt but are unable to pay off their debt. Such companies, given that they just scrape by meeting overheads (wages, rent, interest payments on debt, for example), have no excess capital to invest to spur growth. Zombie companies are typically subject to higher borrowing costs and may be one just event—market disruption or a poor quarter performance—away from insolvency or a bailout. Zombies are especially dependent on banks for financing, which is fundamentally their life support. [1]

Even before the pandemic, there were plenty of Zombie SNFs.

One association executive reported at a conference that the average days of cash on hand among the SNFs in that state was 6 – yes, that’s S.I.X.

And that was the average! Recent national research of over 14,000 nursing homes confirms this; the most frequently reported days cash on hand was 8.28.[2] The study’s authors write:

We find that facilities with less liquidity and those experiencing more severe cash flow shocks had a higher likelihood of COVID-19 reaching residents.These patterns are strongest for financially constrained facilities. We also find higher rates of transmission between staff and residents within liquidity-constrained facilities, which is consistent with these facilities creating a less-effective barrier between groups.

None of this is surprising, of course, when you consider the basic fact that to respond effectively to a shock like what occurred in the pandemic requires resources. The deployment of resources such as personal protective equipment, testing kits and  additional labor all require resources in the form of cash or debt.

Zombie Nursing Homes

During the pandemic, when discharges, deaths and a plunge in admissions and occupancy drained vital cash, there were several rounds of stimulus funds, which added much needed money to SNF balance sheets.[3]  These stimulus funds are keeping afloat nursing centers which otherwise would be forced to close.

As the pandemic wanes, and admissions to nursing homes begin to return, select nursing centers will recover and return to a healthy financial state. But the recovery of nursing centers everywhere – and anywhere – will depend on several factors within the marketplace area:

Demographics

The age of admission to a skilled nursing center has progressively risen in the United States,and is currently over 87 years of age. Also, while a significant percentage (approximately 30%) of those 85+ will find themselves in a nursing home for some period of time, the majority will not. Therefore, only those marketplace areas with an adequate number of individuals over the age of 85 have adequate depth of the age-qualified demographic.

Do you know how “deep” the market is in your marketplace area?

Demand & SupplyZombie Nursing Home

The dynamics of demand & supply operate in every market. In addition to the demographic factors referred to above, when you add alternative supply options, the demand demographics can be quickly diluted. What consumers in the marketplace area see as adequate alternatives, such as assisted living, including specialized assisted living, or home care further dilutes demand for SNF.

Intermediaries

At both the federal and state levels, SNFs were the target of cost-control initiatives before the pandemic. The wide array of mechanisms used include risk-bearing arrangements where intermediaries receive per-member, per-month fees for the entire spectrum of care. These organizations in turn place restrictions and conditions on service utilization such as in a nursing home. The goals of these intermediaries are often not to determine the most suitable venues of care, but to contain costs, thereby improving their margins. These risk-bearing intermediaries further reduce utilization of, and payment for SNF care. But SNF providers have something that these intermediaries do not, and which they very much need: data-based understanding of how to manage the aged and chronic-care populations. This evidence-based knowledge will become the life-blood of the SNF.

Destiny of Zombie SNFsZombie Nursing Homes

Without viable payment models, which would have to include the ability to service a reasonable level of debt, Zombie SNFs have no future. It is regrettable, however not at all unrealistic to anticipate significant SNF closures in the months ahead. As the Provider Relief Fund payments are disbursed by SNFs which received them, only those with adequate demand, correct payor mix, relationships with local intermediaries (including risk-bearing medical providers) and access to debt will be able to continue operating.

In the contemporary, liberal economic culture, businesses which cannot survive in the marketplace should be allowed to close down, go out of business and /or file for bankruptcy. The next round of SNF closures will press this issue at a political and social level – are nursing homes “businesses” or do they represent a distinct class of enterprises, which society needs to support based on its own self-interest, and therefore are “too important to fail”?

Zombie-Proof

Zombie Nursing HomesIn the absence of a robust endowment or sources of charitable donations, at an individual, operational level, the way to zombie proof your nursing center is to assure an appropriate operating margin by managing the mix of payers covering the patients in your SNF. The traditional fee-for-service Medicare beneficiary, who had been among the highest per diem payment sources for SNF’s is an endangered species. In her place is appearing progressively more intermediary-managed beneficiaries (a.k.a. Medicaid & Medicare managed care). Skilled nursing managers must become aggressively more successful using data (the life-blood of SNFs) to negotiate contracts with upstream providers and intermediaries. Securing a seat at the table, negotiating and navigating this landscape is the next existential challenge for nursing centers in many marketplace areas.

Let us know if you need a transfusion!

Stackpole & Associates is a marketing, research & strategy consulting firm focused on long-term care. Irving can be reached directly at istackpole@stackpoleassociates.com and +1-617-719-9530  Mobile & WhatsApp

Join us on Tuesday, March 29th at 12:00 PM EDT for a feasibility workshop

[1] https://www.investopedia.com/terms/z/zombies.asp

[2] Begley, Taylor A. and Weagley, Daniel, Firm Finances and the Spread of COVID-19: Evidence from Nursing Homes (October 26, 2020). Georgia Tech Scheller College of Business Research Paper No. 3659480, Available at SSRN: https://ssrn.com/abstract=3659480

[3] Special Report | Nursing Facilities Have Received Billions of Dollars in Direct Financial and Non-Financial Support During Coronavirus Pandemic. Center for Medicare Advocacy: March 2021. See: https://medicareadvocacy.org/report-snf-financial-support-during-covid/

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