Skilled Nursing Executive Outlook: ‘Illusion of PDPM Budget Neutrality is Over’

The new year is barely a few days old, but leaders across the post-acute and long-term health care space have already predicted an active — and potentially distress-filled — 2020.

As the industry adapts to a new Medicare payment model, the pressures that have bogged operators down over the last few years will continue, from Medicaid struggles to alternative reimbursement structures that will force the savviest providers to change their strategies or risk falling permanently behind.

At the start of each year, Skilled Nursing News asks a wide range of leaders from all corners of the industry — including operators, vendors, and consultants — to answer a simple question: What are the biggest challenges and opportunities that they see in the coming 12 months?

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In the first part of our executive outlook series, published Thursday, one executive put the stakes in stark terms: Adapt, or die. In the second and final part, published below, the leaders we polled were just as blunt.

“The illusion of PDPM budget-neutrality is already over,” Marc Zimmet, president and CEO of consulting firm Zimmet Healthcare Services Group, said in his answer. “We should enjoy the largesse while it lasts, but prepare for the inevitable correction long before 2020’s back-to-school sales are over.”

Read on for SNN’s second set of predictions, worries, and hopes for the coming year.

Owen Hammond, CEO, and Steve LaForte, Director of Strategic Operations, Cascadia Healthcare

Our outlook for long-term/post-acute care for 2020, for better or worse, is the more things change, the more they will likely stay the same. The headwinds, challenges, and opportunities that shaped 2019 seem poised to continue in 2020. PDPM and reimbursement shifts, legislative and regulatory changes and challenges are likely to take up a lot of our time, but offer organizations that are evolving long-term opportunities.

Preparing for PDPM was a huge part of 2019, and while we are in a bit of lull as we continue to assess the early effects, we expect changes to the system from CMS before we reach the middle of 2020 — with more assessment, pivot, and change to follow. Consistent with PDPM, the one constant — and ripest opportunity — for 2020 on the reimbursement front will be the continued growth of value based/risk sharing payment models across the spectrum of Medicare, managed care, and Medicaid. Operators who evolve and increase their focus on patient driven outcomes, and key relationships across the care continuum should be able to position themselves for long term sustainability.

On the regulatory/legislative front, with the third round of the Requirements of Participation coming into effect (without survey guidance), and the rumblings from CMS and Congress of more and stricter regulatory changes, it’s likely to be an active year for operators. The need for zealous advocacy from the operator level, state associations, and AHCA will be of paramount importance.

And of course, labor challenges. Here’s to 2020!

Separately, we are both willing to go on the record with the prediction that neither the Knicks nor the Mariners will make the playoffs — yet again.

Marc Zimmet, President & CEO, Zimmet Healthcare Services Group

What can we expect for the skilled nursing sector in the coming year?

“This is very controversial…Does anyone know…Anyone? Something-d-o-o economics. ‘Voodoo’ economics.”

If you recall Ben Stein positing this question, you may know that Ferris Bueller’s economics teacher is the son of the renowned economist Herbert Stein, whose maxim “If something cannot go on forever, it will stop” tells us all we need to know about what’s in store for us.

It boils down to “rationalization.” The end of the fee-for-service era is upon us — no pain, no gain. I’ve used terms like “comparative integrity, context, and perspective” to connect some of these pain points, and I expect 2020 to be the year it starts to come together.

The SNF revenue-cycle is connected in deep and subtle ways — pull the wrong thread and the whole structure unravels. Want one example? Therapy companies, perhaps more important than ever, were just forced to absorb severe rate cuts to align with the fiscal realities of PDPM. Add an I-SNP capitated element to the same facility, and that contract therapy provider becomes deprived of their Part B oxygen; these models were not designed to function outside the FFS ecosystem.

The illusion of PDPM budget-neutrality is already over. We should enjoy the largesse while it lasts, but prepare for the inevitable correction long before 2020’s back-to-school sales are over. Unlike 2012’s across-the-board 12.6% recalibration, we will see an iterative regressive process that both reduces rates and reweighs the four PDPM components to correct the structural flaws that belie budget neutrality and perpetuate the boundary between the “haves” and “have nots” — just as it’s always been.

Even after CMS corrects the redistributive equation, the “PDPM effect” will continue to ripple through the SNF revenue cycle. I-SNP economics, outsourced therapy pricing models, compliance initiatives, Medicaid rate strategies, Medicare Advantage intervention, CMMI initiatives and a host of other SNF functions damaged by the PDPM shrapnel may never return to baseline. This is not necessarily a bad thing — the RUG system was an abomination, an affront to Hippocrates and armchair statisticians alike. Clinical and financial outcomes will improve because of it, sooner than we think; we’ll just have to develop new ways to quantify performance.

The heavy lift here is moving beyond the political rhetoric that has proved so counterproductive since the last SNF filed a cost report of consequence. It’s long past time for stability, or the industry as we know it may become a functional wasteland — impossible to staff, irrational to measure.

ZHSG’s 2020 mission is to improve comparative integrity across every state — to neutralize local variation equations that distort federal policy, obviate intent, and exacerbate facility valuation disparities. Nearly every national metric used to define our industry lacks context and consistency — from Medicaid funding three-card monte, survey bias, uneven CMMI burdens, dual-eligible discrimination (“Medicaid need not apply”), boutique disrupters — all assaulting an absurdly regulated industry trying desperately to achieve market equilibrium just in time to serve the Greatest Generation.

Without these desperately needed new equitable measures of distress (and political gumption), we cannot hope to sustain society’s bridge to a dignified twilight for future generations — unless we unwind decades of fracture-critical policy that has left far too many providers, employees, and patients in such a precarious position.

Old consultants have long memories. Twenty years ago, 11% of SNFs were in bankruptcy. We’re expecting no such carnage this time around, but when Paul Bowles wrote, “Suffering is equally divided among all men, each has the same amount to undergo,” he wasn’t referring to skilled nursing facilities — but Herbert Stein may have been.

The good news is that we’ll all have 12 months of “20/20 vision” to rationalize our approach to post-acute care and bid farewell to the last vestige of the continuum’s unbridled FFS sector — a pathology that has held us back from improving the structural integrity of a care paradigm that was never designed to last so long.

Wesley Rogers, President and CEO, Golden LivingCenters — Indiana

As we prepare for 2020, it is encouraging to see opportunities we have in the industry to continue clinical and financial improvements. Over the years, I have come to understand that the key to driving successful results is rooted in a combination of hard work, discipline, and time management.

Below are some key areas of opportunity in 2020:

Revenue
Golden LivingCenters – Indiana is forecasting revenue growth opportunities which we think will come from increased 2020 occupancy — projected at 200 basis points. We are expecting a $25 per-patient day, year-over-year increase from Medicare revenue based on our first two months under the new model.

We are confident that we can effectively capture opportunities that exist with Medicaid rate utilization through accurate cost report capture and reporting, as well as case-mix rate index capture and documentation. We also have opportunities to capture value-based purchasing opportunities with both Medicare and Medicaid.

Labor
Labor is an ongoing challenge in the industry. Our focus has been to build our own internal recruiting team to minimize the use of temporary labor and overtime. Given that temporary agency costs are at a premium of 1.7 times that of regular labor costs, and overtime is at a premium of 1.5 regular costs, we think our internal recruiting efforts will help us manage labor cost in 2020.

Developing effective on-boarding and training has been an important priority, because it helps us reduce the annualized turnover rates in each one of our 23 LivingCenters — and it improves the total quality of care our teams can deliver.

Employee appreciation and recognition programs are part of our plan in 2020 to enhance and improve our culture. Implementation of employee satisfaction surveys, and building action plans from the feedback we receive, is currently a quarterly process and we will continue this in 2020.

Regulatory
The regulatory environment set forth by CMS and the state continues to introduce new requirements and expectations that are aimed at ensuring quality patient care in our industry.

Golden LivingCenters — Indiana will continue to invest in education opportunities and increased support to meet these ongoing regulatory expectations. Regulatory compliance, combined with the changing dynamics of our patients, could present one of the biggest challenges we face in the future.

Our patient population is increasingly more clinically complex, and many patients are presenting more challenging behaviors that require us to maintain a strong focus on training, education, and the delivery of specialized programs. Overall, we believe that operators like Golden LivingCenters – Indiana — who are quick, nimble, and able to respond to the individual market demands — will be the most successful in 2020.

Golden LivingCenters – Indiana is empowering our local leaders to be entrepreneurial-minded, with the ability to make nimble and effective changes so that our leaders can quickly adapt to market challenges — and that philosophy will continue to be a key part of our 2020 success.

David Gordon, Shareholder, Polsinelli

Our pipeline indicates that the distress experienced in skilled nursing over the past several years is likely to continue unabated in 2020. Margins remain thin and the labor market is continuing to tighten, imposing increased costs on providers. Reimbursement issues remain challenging, and many economists are predicting a recession nationally — although the timing of that is extremely difficult to predict. What is clear is that distress in the health care segment generally remains very high.

Our firm maintains a Distress Index that measures distress across various segments of the economy. The index is a contrarian measure of economic performance intended to reflect the level of economic distress in the U.S. economy by tracking the increase or decrease in Chapter 11 filings quarterly, based on a rolling four-quarter average.

For the third quarter of 2019, the health care distress index was at 381.67, and has been at record or near-record highs over each of the last 10 quarters. This compares to an index of 25.35 for real estate and 54.64 for the economy generally.

While distress is generally a bad thing, it will create acquisition opportunities for those with solid balance sheets and liquidity. Those that are not afraid of taking on challenging transactions will likely find many opportunities to seize.

Responses have been condensed and edited for clarity. Maggie Flynn contributed reporting.

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