Ancillary Services More Important Than Ever, But Still Risky Path for Skilled Nursing Operators

One way skilled nursing facilities have looked to diversify and evolve post-COVID is by adding ancillary services in-house, such as home health or pharmacy. But as Alan Schabes, partner at Benesch, Friedlander, Coplan & Aronoff LLP, warned, getting into ancillaries for the wrong reasons can be a dangerous path for nursing home operators.

“If you are getting into this business because you want to take advantage of your referral stream, that is a bad idea,” he said during a panel at the eCAP health care conference earlier this month.

There are still a few ancillaries that he and other experts in the SNF space think may be worth a look to invest in.

“They’re more important than ever,” financial services firm Cantor Fitzgerald Managing Director Tony Munoz said of ancillary services for SNFs. “The reason why is because patients that operators are caring for nowadays are sicker so they need these types of services. Also, this is a way for operators to differentiate themselves.”

He said the most important clinical services operators can offer right now include dialysis, wound care, contract therapy and pharmacy.

Investing in ancillaries a ‘difficult space’ for operators

According to Alan Morrison, managing director at investment firm ZAC Capital Partners, adding lab space is another way SNFs can differentiate themselves.

“A nursing home lab is probably the most important ancillary service on a day-to-day basis in the nursing home in terms of keeping patients out of the hospital,” he said.

However, it can be a “very difficult space” for nursing homes to get involved in because it is so difficult for them to make money from it.

“The reimbursement is very low and staffing costs are very high and logistics are very high,” Morrison said.

As more nursing homes look to add more clinical, patient facing ancillary services wound care and x-ray services have been other service areas providers have looked to recently. Similar to lab services, however, barriers exist in implementing some of these programs, especially financially.

“The costs to run your own x-rays, just the equipment alone and the staff, having technicians doing it 24 hours a day, it’s unreasonable … a typical nursing home cannot support cannot support costs,” Avi Grossman, president of PDI X-Ray, said.

On top of that, for some ancillaries, a certain threshold must be met to make them profitable for the service provider.

“Until Gentell started handling about 1,000 customers, we couldn’t provide a level of service that our large competitor out of California was providing,” David Navazio, president and CEO of wound care company Gentell, said. “You really need to have a lot of buildings and a lot of employees in order to provide the type of wound care support that you should have.”

Schabes added that there are certain ancillaries, such as primary care, pharmacy and contract therapy, that at least “intuitively” make sense for nursing homes to control. But, it all comes down to the commercial justification for the business.

“There is one modality of service that if you are in a nursing home business that makes perfect sense to me and that would be the primary care physicians and nurse practitioners, forget about the pharmacy, forget about the therapy, forget about the labs,” he said.

OIG pushes back on ancillaries and SNFs

Schabes described guidance issued by the Office of the Inspector General, released right before Thanksgiving, as a “gigantic knife” in the heart of a lot of joint ventures between ancillary service providers and SNFs.

The office concluded that a proposed joint venture between a therapy services company and a company that owns long-term care communities was prohibited under the federal anti-kickback statute and would constitute grounds for sanctions to be imposed.

The anti-kickback statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an individual to a person of any service reimbursable under a federal health care program.

The statue, as Schabes explained, says that nursing homes cannot get anything of value for their referrals.

“I have looked at more than 50 joint ventures over the last 24 to 36 months and without exaggeration, I will tell you that 10% were constructed very intelligently and well and they were operated in the way that they were originally constructed,” he explained. “And when I looked at them two years out, they were not operating in any way, shape or form close to the way that they were designed to operate. And then I looked at the other 80% and they were a holy mess.”

The biggest mistakes he sees with nursing home joint ventures in ancillary services is that the 60/40 split nursing homes hope to achieve with ancillary service providers is a “myth” and is “unachievable.”

In these joint ventures, no more than 40% of an entity’s investment interests can be held by investors in a position to influence referrals or otherwise generate business for the entity from investors, according to the OIG.

“A nursing homes provider is never going to qualify as a disinterested party,” he said. “I’ve never in 35 years plus of representing companies I’ve ever seen anybody other than a foreign investment company from Singapore that was actually disinterested enough.”

Another problem he finds is that these JVs are often undercapitalized.

“Every ancillary business, especially pharmacy, especially mobile x-ray, requires a significant degree of capital costs in the hundreds of thousands of dollars, if not millions of dollars,” he said. “I cannot tell you how many joint ventures I have seen where the initial capital investment was under $1,000 from both parties.”

Still, he only sees the push toward population health and value-based care growing stronger for the Centers for Medicare & Medicaid Services.

“It’s all about population health and value-based care, and there are companies around, not many of them that … want to have the modalities of care of home care, hospice, inpatient rehab so that they can move the people along and have them be on the right side of care at the right time for the lowest cost alternative,” Schabes added. “And if you’re doing it for that kind of a purpose, then absolutely looking to add ancillary services is something that makes sense and is attractive.”