Pulling Back the Veil Surrounding Nursing Homes…

There is a reasonable chance that you will be admitted to a nursing home or cared for in a long-term care facility at some point in your life – certainly, someone close to you will have been. The adult care industry is massive, currently estimated to be $140 billion in size, and remarkably complex. According to the Center for Disease Control and Prevention’s (CDC) most recent industry survey in February 2019 (Long-term Care Providers and Services Users in the United States), 2.45 million people were either enrolled in adult day care or residents of nursing homes and long-term care facilities. Another 4.46 million were discharged from a home health agency while 1.43 million received hospice services in 2015-2016.

The number of service providers were numerous, creating a chaotic patchwork system with 15.6k nursing homes, 28.9k assisted living facilities, 4.3k hospice providers, 4.6k adult day care centers, augmented by over 12.2k home health agencies. And the need for these services is only increasing as the population ages. According to the National Investment Center for Seniors Housing and Care, the percent of the population 75+ years old in twenty years will be nearly 12%.

 

Nursing Home Ages
Undoubtedly, these very difficult work environments, made dramatically more challenging by the COVID-19 crisis, have been hit particularly hard. The mortality rates are confounding and staggering. Like prisons, the communal settings found in nursing homes and the fragility of the residents have given us heart-breaking stories of loss while exposing significant industry shortcomings. In mid-March, there were an estimated 28.1k deaths among both nursing home residents and staff with 153k reported cases. These residents were only guilty of being old.

 

Nursing Home Death by Age

 

Given inconsistent reporting guidelines by state and the profound lack of testing, there is considerable debate as to the true mortality rates in nursing homes. AARP estimates the mortality rate to be approximately 20% – 25% while the Foundation for Research on Equal Opportunity has painfully tabulated results by each state to conclude the rate is closer to 42% (see map). Commentators have taken to estimating that cases in nursing homes tend to be 10% of the total but 33% of all deaths.

 

Nursing Home Deaths

The nursing home industry is very competitive, and success is largely dependent on case mix and occupancy rates, which have been running around 90% across all senior housing. There was a significant and immediate decline in occupancy rates at the onset of the pandemic, largely attributed to fewer discharges to post-acute settings. At the outset, hospitals were discharging COVID-19 positive patients to woefully unprepared nursing homes in search of beds. In 3Q19, the most recent available quarterly data, “fee-for-service,” Medicare reimbursement rates were on average $523 per day, while Medicaid rates were $214 per day. With expansion of Medicaid rolls, expect this situation to get worse. In fact, 3Q19 was the first quarter where more than half the nursing home days were Medicaid at 51.5%. Analysts estimate that the profit margins tend to be 3 – 4% at these facilities.

 

Nursing Home Occupancy

The leading nursing home operator in the United States is Genesis Healthcare with nearly 400 facilities and is also a provider of a number of ancillary services (more on that shortly). In 2019, revenues were $4.6 billion and after a handful of years of significant operating losses ($1.8 billion cumulatively for four prior years), pretax income was barely $10 million. With an overall occupancy rate of 84% and 76% Medicaid patient-days, Genesis has a market capitalization of only $170 million, which increased 35% last Friday likely on news that the Department of Health and Human Services would provide $4.9 billion of federal aid to nursing homes and that a number of influential states (now over 30 states) will provide liability immunity shields related to COVID-19.

Given the high fixed cost structure and razor thin operating margins, it is no wonder that these facilities tend to be “under-utilizers” of technology. According to the CDC National Health Statistics analysis in March 2020, residential care facilities that utilized electronic health records (EHR) increased from only 20% to 26% from 2012 to 2016. Of those that actually used EHR platforms, only 55% actually had health information exchange capabilities with doctors and pharmacists in 2016. In general, larger facilities (presumably better capitalized, better resourced) were more likely to use technology, while paradoxically, “for profit” operators were less likely to do so. Shocking.

 

Nursing Home EMR

Approximately 70% of the nursing home industry is “for profit,” with private equity investors playing a significant ownership role, and not always a great one at that. Since 2000, a recent New York University study concluded that there were 119 leveraged buyouts in the nursing home sector. Often times these nursing home investors controlled companies that were providing necessary services such as cleaning, facilities management, medical equipment leasing, and other ancillary services at significant margins (see Genesis Healthcare above) to those same homes. Notably, in “for profit” facilities the number of hours of care per patient declined 2.4% and according to federal quality guidelines, staff quality decreased by 3.6% since being acquired. Investor appetite has not let up – according to a survey by Senior House News (February 2020), nearly 40% of respondents assumed private equity will continue to be the leading investor in the asset class.

Nursing Home Owners (2)

An analysis by the Journal of Post-Acute and Long-Term Care Medicine, determined that the Omnibus Reconciliation Act of 1987 was a landmark in overhauling nursing home quality assurance systems and led to much more impactful oversight. Given the “lock down” now in place at nursing homes, the first two lines of oversight (family members, government regulators) are blinded to conditions inside of most facilities. According to U.S. Government Accountability data, the number of abuse violations more than doubled from 430 to 875 between 2013 and 2017. It is estimated that 20% of all emergency room visits by nursing home residents is due to neglect. There are now significant concerns about current conditions.

Tragically unforgiveable, there also appears to be a racial overlay to this nursing home crisis. A recent detailed New York Times analysis determined that 60% of all nursing homes with a minority census greater than 25% of residents had at least one COVID-19 case, which was twice the rate in facilities with minority census less than 5%. This phenomenon did not correlate to location, size or quality rating.

The immediate path forward is unclear. Recent Centers for Medicare & Medicaid Services (CMS) guidance strongly endorses that nursing homes should be the last facilities to re-open, providing a nearly unattainable checklist of conditions to be met. Massachusetts recently put forth a four-page “Nursing Facility Infection Control Competency Checklist” with 28 required items! The American Health Care Association estimates that it will take at least 2 – 3 months to have adequate protective equipment and 4 – 6 months before appropriate testing capabilities can be instituted. But what regional case counts will be acceptable to allow visitors? Quite clearly, inexpensive healthcare technology platforms such as telehealth, remote monitoring, and contact tracing will be an essential cornerstone of managing nursing homes going forward.

8 Comments

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8 responses to “Pulling Back the Veil Surrounding Nursing Homes…

  1. Dan Gebremedhin

    Nice article on an important topic!

    Dan Gebremedhin MD, MBA
    Partner
    Flare Capital Partners | Prudential Tower | 800 Boylston Street, Suite 2310 | Boston, MA 02199
    Office: (617) 607-5057 | Mobile: (617) 686-3820 | Fax: (857) 233-5078
    Website: http://www.flarecapital.com |
    Twtr: @dangebremedhin | Linkedin |

  2. Rajesh Aggarwal

    Thanks Michael. This is a great article.
    Is there not a chicken/egg issue here – nursing homes could surely benefit from technology platforms to monitor their residents, to escalate those who are sick to acute facilities, as well as improve efficiency/effectiveness for care transitions.
    But where are the $ going to come from to pay for this investment in technology, if the margins for nursing home providers are so razor-thin?

    Could technology companies sell their tools/platforms to nursing homes with inclusion of an upside/downside risk-based payment model?

    • fascinating observations – new payment models may get at this vs FFS. i hesitate to conclude that society wildly undervalues the elderly but looking at this sector one starts to conclude that we simply under-invest in this population. the cost to deploy more effective tele-health solutions will go a long way. more thoughtful protocols would certainly help like do not transfer infected people into nursing homes…

      • Anshuman Sharma

        To conclude that society undervalues this population purely on the basis of the long-term care/nursing home/hospice operating margins, Medicare/Medicaid reimbursements and calling it under-investment, would be shortsighted. Unless we have benchmark data from other non-homogenous populations that appropriate care across sub-populations, add to that equation, not just the cost but effectiveness of that care, we shouldn’t be making such value judgements. We can have myriad hypotheses around whether each sub-population is getting the appropriate level of care based upon cost(investment), quality and access (across demographic differences) and then compare that to similar sub-populations elsewhere. Those hypotheses have to be then guided by the social structures and ethos of that particular society that overlays above the demographic differences.

      • thanks for the comment, anshuman. the fact that operating margins are so thin was not meant to equate to how society values the elderly; it was simply an observation that those business models will continue to struggle as currently architected. the anecdotes of nursing home operators who also own the supporting service providers suggests the margins that would otherwise be generated by the regulated nursing home is being realized through related companies, likely out of sight of the regulators. your analysis would be fascinating to see.

  3. He Wang

    Thank you so much for this great piece!

    I am wondering if you have any more data or details on how PE-owned SNFs/ALFs interact with ancillary service providers owned by the same sponsors? Would be interesting to dig deeper into this behavior.

  4. Michael- excellent as always.

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