Skilled Nursing Bed Shortage Will Only Get Worse as Operators Chase Acuity

Despite industry headwinds, analyses have found that the nationwide supply of nursing home beds falls far below potential demand for the services — a trend that will only worsen as changing payment models knock some providers out of the business entirely.

Writing in a commentary piece last week, Cain Brothers director Taaha Shaikh claimed that the upcoming Patient-Driven Payment Model (PDPM) will serve to widen the gap between “haves” and “have-nots” in the skilled nursing world. The operators that have the spare capital to invest in their physical plants and new higher-acuity clinical capabilities will win the day, Shaikh argued, while lower-performing facilities with older physical plants will struggle even harder to survive — or leave the game altogether.

That’s a problem given evidence of under-bedding in the SNF marketplace: As of 2015, there were only 1.7 million skilled nursing beds available for a Medicare-eligible population of 47.8 million people, according to a recent analysis from professional services firm Marcum LLP, for overall penetration of just 3.62%.

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While SNF usage really only picks up among seniors who reach their 80s and beyond, making that number slightly less frightening, the population of older seniors will only grow as the baby boomers age into Medicare, and the strain on the industry could be significant — while also presenting new opportunities for providers with the capital and expertise to take advantage.

SNN spoke with Shaikh by phone to expand on his recent commentary and identify some of the upside for providers in this tumultuous time for skilled nursing facilities.

Aren’t we already seeing a major gap between haves and have-nots in the skilled nursing space? How much worse can it get?

I think it is something we’re seeing today. The easiest place to see it — even well before PDPM was even an issue — was in age of plant. You see the lower-quartile SNFs have a markedly worse age of plant than the upper quartile SNFs. That’s just a result of the same theme that we’ve seen played out across the American health care system. The haves and have-nots theme has been there for a long time in some form. 

[For] a lot of SNFs, especially in areas where reimbursement isn’t as great or costs are just higher, often what suffers first — and in the end, what suffers most — is capital reinvestment. That’s been creeping up for years, and that’s been creeping up in the SNF space, and you’ve even seen to a large degree it creeping up in the acute care space, with hospitals. 

That theme has played out over and over, and it’s easy to see in a lot of different ratios before you even get to PDPM.

The physical plant issue comes up a lot, but there still isn’t a lot of new construction in the space — especially of more traditional facilities aimed at long-term residents.

A big part of that is a lack of incentivization. You don’t build the skilled nursing facility because that’s what makes sense. You wait until the last possible minute to replace the skilled nursing bed you probably inherited when you took over a facility — and simply out of the need to have to provide that care contractually.

When you look at the world of skilled nursing operators, a lot of it breaks down into ultra-localized or regional operators who’ve either been in that business their entire existence, or these one-off SNFs that are part of larger continuing care retirement communities (CCRCs) — which are often from the revenue standpoint, and certainly from a cost standpoint, the bane of their existence. They have to have it around in order to provide care for the residents that they have, because they’re contractually obligated to, but they can’t figure out a way to turn a margin on this because either it’s too small in order to be able to cut costs down and really attract a local acute care provider, or it’s a crowded market.

It’s a tough spot to be in, but you’re 100% right. This is already an under-bedded aspect of the health care system, and it’s becoming more and more critical as acute-care providers continue to look at ways to reduce average length of stay as they look for reliable — and I stress reliable — places where they can put patients to maintain a level of observation as they recuperate, without the heavy risk of readmission. Skilled nursing facilities that are able to provide that, especially at the higher acuity and more complex case mixes, they can win. And they’re becoming more and more important.

Do you foresee a sell-off among the losers after PDPM takes effect?

I think it’s going to depend, really, on how acute care providers play in. If we hit PDPM and those skilled nursing providers that have historically either not tracked quality well or are really just not tooled to handle high-acuity patients — what happens to that set of skilled nursing facilities? As those beds go away, the market for beds to put patients that you need to make sure have eyes on them shrinks. How do acute care providers react? 

There are a couple of avenues that keep being suggested; one of them is home health. And home health is definitely a low-cost option, but its biggest drawback is that it’s also minimal observation. Usually you only have one nurse’s visit a day, and that’s just not enough. An acute care provider in a market that’s starting to now see skilled nursing facilities go away, or get mothballed, or get shut down because they just can’t compete in the new PDPM environment, is going to have to face a hard decision of: Well, do I just keep the patient in my acute care facility? Or do I go out there and find a skilled nursing partner that either I can invest in, or maybe joint venture with, or I can merge with, that gives me the extender on the lower-cost. observation-based bed where I know I’ll have a nurse watching them 24 hours a day, and my physicians can round? That’s where the opportunity is.

There’s this idea that home health is eating SNFs’ lunch — and that the skilled nursing industry is effectively static in terms of growth. But you’re right that there’s always going to be people who need this kind of care institutionally.

Right. From that perspective, looked at another way … it’s a forced deficiency in that market. The skilled nursing providers whose lunch is being eaten are the ones who are concentrated on low-acuity cases. Yes, the technology on the home health care front is probably there, where super low-acuity cases can go straight home and be monitored very well through technology. You’re seeing some of our clients deploy technology in their home health care practices very well. They’re able to monitor even low-risk dementia patients and things like that.

But the skilled nursing facilities that are concentrating on that are going to find themselves in the wrong business, and the skilled nursing facilities that are focused on providing a quality metric-based and care-driven [model with a] high-acuity mix patient class and concentrate there — those guys are always going to have a place in the system, and if anything, they’re going to be in high demand.

If there’s two or three takeaways that I can throw at you: Obviously, skilled nursing facilities are an important part of the acute-care system, and they’re going to be a more important part as we move forward. The skilled nursing facilities that are tooled correctly — that means they’ve made the investment or are ready to find a partner and make a co-investment in technology — can win. The way they’re going to do that is going to be through exactly that, some sort of off-balance-sheet approach, because relying on balance sheet alone probably is not going to cut it.

This interview has been condensed and edited for clarity.

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