For better or for worse, the federal government’s star-rating system for ranking skilled nursing facilities has taken on outsized importance as preferred provider networks narrow and Medicare Advantage plans demand better and better quality.
The ratings from the Centers for Medicare & Medicaid Services, therefore, have become a quick and seemingly formal way to separate the good SNFs from the ones that need improvement. As a result, maintaining good grades has become an essential part of each SNFs’ strategy to attract residents.
A new study seems to prove that out: Getting higher star ratings from the Centers for Medicare & Medicaid Services does have some relationship to improved Medicare census at skilled nursing facilities that are more than 15 years old, according to a new white paper.
But the strength of that relationship isn’t clear.
The key takeaway for SNFs, according to Senior Housing Analytics principal Larry Rouvelas, is that depending on star ratings for improvements isn’t going to be enough to keep beds full.
“Don’t rely on improving your star ratings alone and believe that’s a clear path to improving the Medicare census,” he told Skilled Nursing News.
Stars relate — loosely — to census
Though some SNF investors seek to boost value by improving a facility’s Five-Star Quality Rating System numbers, the Medicare average daily census (ADC) of a facility has a loose connection to star ratings, the white paper noted.
The paper, authored by Rouvelas and Evident Analytics principal James Wesley Howell, evaluated 4,200 SNFs that were more than 15 years old in the top 100 metropolitan areas, with competitors within a five-mile radius. They compared each SNF’s Medicare ADC, along with its overall star rating, with those of nearby competitors.
Each additional star was associated with, on average, 1.3 additional Medicare ADC, but that relationship wasn’t necessarily direct, the authors noted. Several SNFs got more ADC, while others got nothing; other factors at play included proximity to hospitals, having private rooms, and how close referral relationships were to the hospitals.
“Those things probably drive as much or more of the Medicare census,” Rouvelas said. “But those are generally hard things to change. What you can control to some degree are the stars … You can’t easily create more private rooms without significantly reducing facility capacity.”
Senior Housing Analytics provides senior housing reports and market analysis, as well as a market analysis tool for SNFs; Evident Analytics provides reports and analytical solutions.
Return on investment in stars?
Though the correlation between star rating and census doesn’t equal causality, if one assumes causality and combines it with some financial calculations, it’s possible to come to an estimate of the asset value of additional stars. The white paper did just that, assessing a 124-bed nursing home in Cumberland, Md., as a case study.
The SNF averaged 15 Medicare ADC and had three other SNFs within five miles. The average ADC of the four facilities was 72, and if each SNF was equally appealing, they could expect to split ADC at 17 apiece. The fact that the case study SNF was at 15 ADC meant that it underperformed the market.
If the investors in the SNF wanted to grow Medicare census by becoming a five-star facility — the SNF’s overall rating was at one star — they could ultimately expect to have, on average, 5.2 more Medicare ADC, the white paper concluded. At an average Medicare daily rate of $450, the additional ADC generates $214,000 incremental revenue annually, it said.
“If the contribution margin of an incremental Medicare resident is 40% (a rough estimate), that means $85,000 incremental NOI,” the authors wrote. “At a 12%
cap, that NOI translates to $712,000 incremental asset value.”
The authors noted, however, that correlation is not causation and that “improvement … is by no means assured.”
One other factor is that the overall stars aren’t always considered the most important, Rouvelas told SNN. Some of Senior Analytics’ clients place more emphasis on the stars that specifically measure certain quality metrics, for instance.
And when it comes to causality, the stars could have more going on under the surface.
“Most improvements programs focus on aspects broader than just the star ratings,” Rouvelas explained. “And so, in some ways, the stars may be proxies for other useful things that are meant to encourage broader census.”
Written by Maggie Flynn