The future of skilled nursing facility construction and transactions is tied up in state licensing procedures like certificate of need (CON) approvals, with some operators at a standstill due to application backlog during the early months of the pandemic.

A backup of applications, which are required in several states to build any health care building or transfer ownership, has caused “a lot of anxiety” among skilled nursing dealmakers attempting to close on a transaction, attorney Paul Mourning told Skilled Nursing News.

Mourning is a partner at New York City law firm Crowell & Moring, and co-chair of the firm’s health care group.

“Since March of 2020, the [Public Health and Health Planning Council, PHHPC] has not considered any applications, any CON applications for skilled nursing facilities [in New York],” said Mourning. “That’s 19 to 20 months now, where none of these transactions have been able to move forward.”

Mourning said he hasn’t had the same issues closing transactions in states that don’t require certificate of need.

New York is one of 35 states that still requires CON, according to the National Conference of State Legislatures (NCSL) and National Academy for State Health Policy (NASHP). Approvals by the New York State Department of Health (DOH) and the Public Health and Health Planning Council (PHHPC) are needed to sign off on a CON, Mourning said.

Mourning has finally started to see “light at the end of the tunnel” however, with movement from the department of health on certificate applications recently indicated by applicants receiving questions from the state entity.

Mourning added a caveat to his cautious optimism: a backlog on a process that usually takes six to 12 months in one state alone will likely be drawn out further even if applications are finally being reviewed.

“I know that there haven’t been any CON applications on the agenda of the Public Health and Health Planning Council, yet we’re seeing some movement,” noted Mourning. “While hopeful that the process is gearing up again, there’s also a concern that they’ve got a backlog in the pipeline.”

Origination of CON laws and state variations

The certificate of need (CON) program rolled out in the 1970s, according to Jason Lundy, a shareholder at Kansas City, Mo.-based law firm Polsinelli, as a way to control overconstruction of health care facilities, which would in turn drive up the price of health care when providers pass along construction costs to patients.

Lundy focuses on long-term care regulatory environments at the firm’s Chicago, Ill. office.

“All states are different — Illinois right now is very very slow … the whole CON process has ground to a halt,” said Lundy, adding applications are taken on a first-come, first-served basis and considered individually.

By comparison, Florida, another CON state, conducts a comparative review of applications. Local CON agencies will put out a bid for a nursing home build in a given geographic area, and any architectural firms, operators or owners interested can submit their CON applications which are then reviewed in batches.

“[CON Boards are] controlling the amount of new buildings and expansions, it can pump the brakes when it thinks there’s been an over build of facilities, or it can grant permits when they see a forecast of need,” said Lundy. “A bit of a cynical view of it is, it’s kind of a grant of monopoly power to existing providers, and any new entrant into the area or any competitor to an existing provider has to go through additional hoops of getting the government agency permission to enter into the marketplace.”

Echoing Mourning’s experience in New York, Lundy said building in a CON state is oftentimes “lengthy and expensive,” sometimes taking well over a year. Opposition to building is usually seen from market competitors instead of the public, Lundy said.

Not all CON requirements are the same

There’s a lot of variance regarding CON applications, Lundy said — how much time a company has to complete an application, object a decision or appeal can be “vastly different” from state to state.

It remains to be seen how floundering occupancy in skilled nursing, made worse by staffing shortages, will affect CON procedures, and in turn new skilled nursing facility builds.

“There should be a lot of discretion with CON boards to take into consideration the unique situation with COVID and how that could influence occupancy numbers,” said Lundy. “A board could say, we’re going to take that into account and approve a new building, even though occupancy rates are lower than the historical norm, because we know why.”

Added Lundy: “Or they can say, we know why occupancy rates are lower than normal and it’s an unfortunate time to seek to build a new building, but we’re not going to vary off of our historical percentages.”

While obtaining a CON takes a vast amount of time and resources, existing operators may bolster their bed counts by adding a small amount of square footage while staying below the CON threshold, Lundy said.

There were 15,600 nursing homes in the U.S. as of 2016, according to data collected by the CDC. More than 550 nursing homes closed from 2016 to 2020, before the pandemic ramped up in the United States, a Forbes article found.

CON States and SNF Beds

Rick Marshall, president and CEO of continuing care retirement community (CCRC) Genacross Lutheran Services in Toledo, Ohio, said operators looking to build in the state will be hard pressed to get a CON for more skilled nursing beds.

“If you’re seeing new builds, somebody has bought a license from someone else and they’re building a new building to put it in,” said Marshall, adding that more SNFs are being bought up by large providers.

Future builds, at least for CCRCs, are expected to be light on the skilled nursing side in order to make more room for independent living, assisted living and memory care, Marshall said.

“If I built a skilled nursing facility at all, it would focus on short-term rehab, those that really need to come through and receive that care, and then maybe more of the end-of-life type of care — high level of needs that that you see at certain points in long term care that you can’t meet in assisted living,” Marshall said, terming it a “downsizing” of long-term care. “It would be a much smaller portion of the overall continuum.”

Even in robust markets like San Diego County, in a state that doesn’t require a CON, builds that add skilled nursing beds to the community have been stagnant.

“There are the two I’m aware of in the greater San Diego area, two new buildings. Mostly you will see a lot of acquisitions — the same facilities will change ownership and change hands,” said Preet Kambo, vice president of facility operations for skilled nursing operator Beecan Health, based in Glendale, Calif.

Kambo said the two buildings opened in the last couple years, after about a decade of infrequent SNF builds.

“It’s a large market, but at the same time … if you compare pre-pandemic versus post-pandemic occupancies for skilled nursing facilities, [it has] declined nationwide,” added Kambo. “So, is there really a need to build more, looking at that?”