The new Medicare payment model for nursing homes has brought significant upheaval around therapy provision — an outcome that one prominent CEO in the space says therapy companies should have seen coming sooner.
Given all of the warning signs from Washington and Baltimore — dating back to when the federal government was planning on implementing the since-scrapped Resident Classification System, Version 1 (RCS-1) — third-party therapy providers shouldn’t have been shocked by the early effects of the Patient-Driven Payment Model, Sabra Health Care REIT (Nasdaq: SBRA) CEO Rick Matros told SNN.
“What did they expect, anyway? All the negotiation, even going back to RCS-1 — from RUGs to RCS-1 to PDPM — you’re surprised? Really?” Matros said.
Matros’s comments came during a wide-ranging conversation last week at Sabra’s headquarters in Irvine, Calif., in which the CEO and chief investment officer Talya Nevo-Hacohen offered their thoughts on the PDPM changeover, nationwide Medicaid struggles, and the overall future of the post-acute and long-term care space.
Matros pulled no punches when discussing the current state of Medicare-funded therapy in nursing homes, which has seen layoffs and increased productivity demands as operators adapt to the new payment landscape. In a future piece, SNN will explore Nevo-Hacohen’s plans for the REIT’s nascent push into the behavioral health space; this interview focuses on Matros’s assessment of the post-PDPM landscape.
Let’s start with what you’re hearing on PDPM.
We’re getting really positive reports from our operators. Two things: One — and you and I have talked about it before — there’s no way it was ever going to be revenue-neutral. Most of our operators are reporting increases in rates; they think they’re going to see longer lengths of stay, just because you’re going to be focused on nursing patients, not just short-term rehab patients. So by definition, you can have a longer length of stay.
The only thing you have to be careful about right now is, for some reason, CMS defined everybody as a new patient on October 1. On a new patient, they sort of front-load the first few days of the NTA [non-therapy ancillary] rate. Since everybody was new, it front-loaded everybody. So I think October is going to be artificially elevated, and then over November, December, we should kind of see how it is.
But it’s still not going to be revenue-neutral. I actually thought it was going to be at least six months before we’d start seeing any real benefit; I think it’s coming sooner than that now.
The other thing, and this is going to be one of the most interesting things to watch: You can go to 25% on concurrent and group, and the historical average — when the industry had that — was 26%. The new cap is kind of in line with where the industry was. The problem is you had RUGs-IV in between, with no concurrent and group, and 85% of your revenues in very-high and ultra-high RUGs categories.
On September 30, if you had a patient in the very-high category, you can have them in group the next day. If you translate that to minutes, you’re going to go from 600-plus minutes to 400 the next day — it raises a red flag, and CMS is going to look for red flags. You’ll recall, almost every DOJ investigation on any particular company was all around the minutes.
Unlike a lot of other people, operators have memories like an elephant. They don’t forget anything — any perceived slight, any clawback. They don’t forget anything. So our operators are telling us that they aren’t going to go from zero to 25%, that they’re going to take it slow — maybe build up to 10%, 11%, 12% group therapy. Group therapy will really fit, I think, to the extent you have MA patients in your facility — it’ll be really good, because they squeeze you so much on rate on MA.
It’ll be really good for MA and the insurers; as long as the outcomes are good, they’re going to be fine with that, and then maybe a slow build after that. I’ve heard, anecdotally, there are some operators that want to grab everything they can, and they’re going to go from zero to 25% —and I think they’re going to get their asses kicked.
There’s obviously been a lot of upheaval around therapy, with layoffs and therapists anecdotally reporting unrealistic productivity goals. It kind of surprised me that it happened so quickly after October 1, almost like the flip of a switch.
I have no sympathy whatsoever. I think they need to grow up, because they’ve taken advantage of the system — those companies have taken advantage of the system for years. You look at other areas in health care where there’s been a lot of promotion, because of the shortage of physicians, of professionals that can take on some of those responsibilities so that people can actually receive care despite a shortage of physicians.
So you’ve got a lot of growth in PAs [physician assistants], you’ve got a ton of growth with NPs [nurse practitioners]. But you look at the therapy associations — and despite the industry working with them for decades to allow assistants and other categories to grow, to help accommodate the severe shortage we have of therapists — they never wanted to do it. It was all self-serving: Let’s keep a shortage in place. We can keep salaries inflated, and they always took advantage of that.
They always used their leverage with the shortage. If you are outsourcing therapists, all the outsource companies, they always took advantage of you. So for them to cry foul now is, you know, kind of too bad, really.
If you look at the Genesis number, it sounds like a big number. But I don’t know that it’s a big number, right? If you just look at whatever it was, 500 people —
It was about 585.
That sounds like a lot, but that’s a huge company. Is that really a lot in the context of all the therapy that they provide? If laying those people off, and having some percentage of people in group and concurrent therapy, leaves you with under 10% group and current therapy, how is anybody taking advantage of that?
Now you’ve got the third-party therapy companies actually having to be flexible on pricing for the first time. So to me, it’s just: Y’all were sitting pretty, and you were never there to help the industry. With all the headwinds that have happened, the therapy companies never stood up — where a lot of other vendors did. They extended terms and all this kind of stuff, and a lot of the therapy companies just didn’t — so I have zero sympathy for them.
There’s a shortage of therapists in the country; there are plenty of jobs for them to get if something isn’t available in the skilled nursing facility in their community.
That may sound too hard-ass, but I just think: What did they expect, anyway? All the negotiation, even going back to RCS-1 — from RUGs-IV to RCS-1 to PDPM — you’re surprised? Really?
In private conversations I’ve had, a few folks — including analysts — expressed surprise that there weren’t more layoffs, just from a purely financial standpoint.
Those companies aren’t going to make it. A number of them are talking about merging together. I’ll tell you, the operators feel really good that for the first time, they can say to a therapy company: “If you want to continue to have our business, this is what the pricing is going to be.” With all the hammering that the industry has gotten from MA on the short-term rehab patients, the therapy companies never helped on that.
The therapy companies I’ve spoken with do emphasize that they’ve worked hard to adapt to the new model, including around group and concurrent therapy, but they also express the same fears as you about jerking the wheel too far in the other direction right away.
I think the good operators are going to do this the right way, and sort of take it slow — which you can say is smart, but it’s also pretty admirable. They’ve been undergoing these headwinds for so long right now — the appeal of trying to grab as much as you can, as soon as you can, has to be there. And the fact that they’re showing — I’ll just talk about our tenants — a really high level of restraint not to do that, I think is pretty good.
I think the other reason that profitability will improve is because however much training went into the nurses, and the MDS coordinator — because they’re now in charge of coding, not the therapists — there’s no way in month one or month two, they’re going to be as good at it as they will be in month eight.
A report came out right before Thanksgiving showing that operators are leaving money on the table because of those early coding jitters — including multiple “impossible combinations” — but even still, the analysis found 90% winners and only 10% losers. That seemed to be a little unbalanced to me.
We’ll see. I think in terms of the concern about what CMS going to do if the expenditures go up too much — I think it’s going to be interesting to see. You’re hearing from a number of states — and you probably see it every day — that there are nursing home closures all over the country because of poor Medicaid rates.
There was Massachusetts — there’s so many, it blew my mind. It’s happening in the Midwest, and it’s happening in Washington state. So you have an increasing demographic, with an unnatural decline in supply because of poor rates — and then a natural decline in supply, because as people modernize buildings, they’re going to take beds out of service to have more common space, more private and semi-private rooms.
How hard can you come down on a business that doesn’t have enough beds to accommodate people? I think that’s a factor that didn’t exist on the RUGs-IV clawback. I also think on the RUGs-IV clawback, it was egregious how much more money everybody was making so quickly, because it was just a poorly designed system — and it wasn’t illegal. It’s just that people are going to take advantage of the rules, and the rules are poorly put together for that.
Then you had the recession. So the clawback shouldn’t have been as big as it was, but the recession caused the Obama administration to grab a lot more than we thought was justified.
I know we’ve talked about this in the past, but you mentioned bed supply — it would shock me if I ever saw a press release come across my desk about a new long-term care property.
Outside of Texas.
Yes, outside of Texas. Nine times out of 10, the new projects are all gorgeous transitional care buildings aimed at high-end, short-term rehab residents. What would it take to get people excited about investment in those desperately needed long-term care beds — whether it’s a REIT or a private equity player or some other investor?
Over half the states have CONs [certificate of need laws] — and even the states that don’t have CONs, the regulatory hurdles to build a facility are so enormous, it just increases your expense on building the facility. Texas just doesn’t have any of that, so it’s simpler there. And I don’t know whether you look at that as a model, with some parameters on controlling growth.
Then you’re limited in how big you can build a facility in most states, even where you can build. You really only want to build Medicare and insurance only, because Medicaid is so bad — so that that’s the third thing I think that has to be addressed: Who’s going to take care of the indigent Medicaid patients, when the rates are so bad in so many states?
If you’re going to build a 120-bed building, that’s not going to be all Medicare and insurance — so you’re going to have to have Medicaid in there. And as soon as you start penciling in — okay, if 50% of my patients are Medicaid, or 40%, it’s just not going to pencil. There are just huge, huge issues to address there.
A lot of the buildings are offering Medicare only — they’re not even getting certified for Medicaid, which is really problematic, and it doesn’t really fit with PDPM. It fit with RUGs-IV, because with RUGs-IV, you could focus on just admitting patients that you could then send home, or to an AL, or home with home health or whatever.
But with PDPM, you’re accepting patients that have nursing needs and co-morbidities and all this stuff. They’re going to be on Medicare when they come in the building; on day 22, say, they’ve maxed out, and they’re going to come off Medicare. But because they have so many other issues, and they’re 90 years old, they can’t go anywhere else — and their acuity level is too high to be accommodated at home with home health or AL, which is only taking private pay.
This is a true, true Medicaid patient. So on day 23, they have to stay in the building; they have to convert to their secondary payer status, which in over 90% of the cases is Medicaid. So where are those people going to be accommodated? It’s a huge societal problem.
This interview has been condensed and edited for clarity.
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