Investing in Staffing Doesn’t Necessarily Lead to Skilled Nursing Profits

When it comes to staffing, skilled nursing providers may be caught between a rock and a hard place.

Regulators have cracked down on the industry over staffing levels, hitting several facilities with one-star staffing ratings in 2018 after payroll-based journal data showed fluctuating workforce numbers. But a data dive by accounting firm CliftonLarsonAllen (CLA) found that investing in staffing star ratings may not actually correlate with profitability.

To improve their overall financial standing, SNFs would do better focusing on their survey and quality ratings under the Centers for Medicare & Medicaid Services (CMS) five-star system, according to a webinar hosted by CLA health care principals Cory Rutledge and Matt Wocken.

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“One way we could look at this is that if there’s money to be spent to try to get a certain five-star outcome, that money could be better used focusing on survey, focusing on quality outcomes as measured by CMS five-star, as opposed to spending that money on [staffing],” Rutledge said on the webinar held by CLA on Wednesday.

Correlation between profitability and ratings

The webinar explored the results of a deep dive into SNF profitability data that CLA conducted using its own database, CLA Clarity, and IBM Watson — though using the latter didn’t turn up much in the way of concrete conclusions, Wocken noted. Wocken and Rutledge examined the correlation between the components of the CMS rating system and SNF financial performance, using the median values for each metric to show how SNFs of various star levels stacked up against the national average.

National Trends in SNF Profitability: Operating EBITDA and Operating Margin Percentages CliftonLarsenAllen

They found that an overall rating of five stars is a very strong predictor for nursing home financial success. The SNFs that had such a rating — in CLA’s data set, this included 3,455 facilities — exceeded the national median for both operating margin and the margin of earnings before interest, tax, depreciation, and amortization (EBITDA).

Specifically, facilities with an overall star rating of five stars had EBITDA margins of 11.2% in 2017, compared with a national median of 10.1%. Five-star facilities had an operating margin of 1.3% in 2017, compared with the national median operating margin of 0% in the same year.

A drop of just one star had a significant impact on the EBITDA and operating margin, CLA also found: EBITDA margin dropped to 10.3%, and operating margin fell by almost half, down to 0.7% for four-star facilities.

Of the ingredients that go into CMS’s five-star rating, the survey is the one that has the biggest impact, and SNFs with strong survey ratings did much better than the national median on EBITDA margin and operating margin, Wocken noted. In fact, SNFs with a rating of five stars on their survey component had EBITDA margins of 11.9% and operating margins of 1.7% in 2017, according to CLA’s data.

The quality rating showed a similar phenomenon. SNFs with five stars on quality had financial results that surpassed national medians, though not to the same level of facilities with overall five-star ratings or a perfect survey assessment.

Staffing returns don’t match investment

But facilities with a high rating on their staffing won’t necessarily see the same results, the CLA data showed. In fact, facilities that perform well on their staffing ratings see financial results well below those of national medians.

“These are a bit unique,” Wocken said on the webinar. “It is an inverse relation between stars a facility earns and the financial performance they experience.”

It’s not that SNFs get no benefit from having a five-star rating on staffing; for instance, they have a much stronger Medicare fee-for-service day mix at 14% than the national median of 10.4%. But the resulting boost in revenue isn’t enough to make SNFs rated five stars on staffing more profitable than their peers. EBITDA margin in 2017 for such facilities is 8.6%, compared with the 10.1% 2017 national median.

And while SNFs had a median operating margin of zero nationally in 2017, facilities with a five-star rating on staffing had an operating margin of -1.3%.

The culprit lies in the cost of getting to that particular five-star mark.

“Within these five-star staff [facilities], there is over eight hours per day paid staff time, which is much higher than the national median,” Wocken explained on the webinar. “And what this does is drive the full cost per patient day to $275 per day, and even with the improved Medicare percentage and consistent occupancy, [it] is not enough to provide a financial gain for the facility.”

But this doesn’t mean that SNFs can ignore staffing. For one thing, regulators are using payroll-based journal data to bolster state oversight of nursing homes. Strong staffing is also a key factor in family satisfaction, according to research published last year in the Journal of Applied Gerontology. That means providers have to find a good balance in terms of metrics when investing in quality.

“That sweet spot, in my view, is having survey of four or five, quality metrics of four or five, and staffing in the three to four range,” Rutledge said on the webinar.

Another point to consider is realizing efficiencies to save money and address the narrow margins.

“Cost structure is the lynchpin to profitability,” Rutledge emphasized, and a lean cost structure is essential to better margins. So even though more Medicare and Medicare Advantage patients are going to highly rated SNFs, a high star rating alone won’t be enough to save a facility with bloated costs.

With their margins so narrow, SNFs have to be judicious about how they invest their dollars to improve, both Rutledge and Wocken stressed. But no matter what they focus on, they still can’t afford to ignore their ratings.

“Referrals are going to high-quality providers,” Rutledge said on the webinar. “Networks are narrowing … and those without strong metrics will simply be left out in the cold.”

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