Skilled Nursing Game Changer: Calls for Innovation in HUD Financing Gain Momentum

Lenders, operators, industry lobbying organizations and consumer advocates all agree that an expansion of skilled nursing financing programs through the Department of Housing and Urban Development (HUD) could be a game-changer in driving much-needed innovation.

Building on suggestions from the National Academy of Sciences, Engineering, and Medicine (NASEM), the authors of a recent Health Affairs article called on the federal agency to expand nursing home financing options, namely to attach more favorable rates to projects that meet certain incentives or pursue particular innovations, like the small home model — a prospect welcomed by Green House leaders — or investing in remote patient monitoring.

Bob Kramer, co-author for the Health Affairs article and founder/fellow of Nexus Insights, said the focus on HUD was “all under the rubric of what would really drive change and innovation.” Kramer also is co-founder and strategic advisor at the National Investment Center for Seniors Housing & Care (NIC).

“Ultimately, I think this is inevitable,” said Kramer. “Hopefully we’ve sped [CMS and HUD] along by writing a piece calling specific attention and saying, ‘What could be done?’”

Kramer wants to see less siloed action between government entities with CMS and HUD collaborating more for the sector – HUD financing is a “clear and obvious lever” to pull.

HUD officials do appear at least open to ideas.

In a statement to Skilled Nursing News, a spokesperson for HUD said that the agency is aware of the NASEM study and is “grateful” for its articulation of the FHA Section 232 program to nursing homes and the wider national health care system.

“We always welcome feedback and suggestions on the evolution of our programs,” the spokesperson said.

Many HUD lenders are “totally on board” with the prospect of a HUD program expansion for skilled nursing, Kramer said.

“I thought it was the kind of story we needed,” said Steve Kennedy, executive managing director at VIUM Capital, one of the leading HUD lenders in the skilled nursing sector. “HUD tends to kind of focus down, do its thing, but what a great platform to help drive change.”

HUD can be a useful tool for the Biden administration to align different agencies to its reform initiatives for the sector, but that there’s likely to be some give and take if the agency chooses to pursue program expansion, said Scott Thurman, head of FHA healthcare production at Greystone, another top HUD lender.

“I think it’s a great idea, and it’s an ambitious idea,” said Thurman. “There [are] certain limitations that they’ll have on what they can offer on that, versus having to go through a grant process or Congress allocating funds to [operators] for some other kind of incentives that they can offer.”

Pulling the lever

There are precedents to look at in considering how HUD could incentivize more skilled nursing innovation.

Kennedy said the agency try to do something similar with the Green Mortgage Insurance Premium (MIP) program, to influence capital expenditures in the housing market, where borrowers can get discounted mortgage insurance if they make energy-efficient improvements, among other requirements.

“HUD doesn’t control interest rates, the market controls the interest rate … but they could reduce the mortgage insurance premium,” added Thurman, also referencing the Green MIP program.

There’s also the HUD 202 program to look at as a mode, Kramer said. The 202 program deals with affordable housing guidelines. Kramer has been involved in the development of the 202 program through the Arundel Community Development Services board.

Similar to 202, HUD and CMS could offer quality operators that fall under an approved set of innovations quicker access to HUD loans, which might burn off over time and convert into grants, he said.

The HUD 202 program already offers some assisted living grants, Thurman said, on top of subsidizing the rent using Section 8, allowing some units to be switched over to assisted living.

“We talked about the possibility of having a point system. Operators will want to have input into that, you’re going to have lenders want to have input to that … CMS certainly will want to have input to that, and the HUD officials themselves, I’m sure consumer advocacy groups and others,” said Kramer. “We think we’re already seeing success, getting the focus on this and starting the discussion now.”

Kramer said it would realistically take a year or two to get criteria and guidelines in place for HUD program expansion.

Many paths toward innovation

New construction financing is sorely needed in the skilled nursing space, Kramer added, with the average age of skilled nursing buildings being more than 40 years across the 140 metro markets tracked by NIC MAP Vision.

The consistent average age of buildings can be traced back to the Great Society Medicare and Medicaid legislation in 1965 – the late sixties and the seventies saw an “explosion” of nursing home development, Kramer said.

“You’re dealing with very aged physical structures. The flaws of that were really demonstrated writ large by the challenges of Covid,” he said.

Covid also raised the question of where funding will come from to update air purification systems, convert to private rooms and rethink the traditional institutional-type layout of nursing homes – all these factors became critically important for infection control and prevention.

“It’s important that we leverage what we learned … this could be a game changer, it could really provide that level of support and incentives to really help us achieve what we all want,” said Susan Ryan, CEO of the Center for Innovation, parent organization of The Green House Project and Pioneer Network. The not-for-profit’s non-institutional eldercare environments are designed with private rooms and large communal spaces that better match patient preferences.

Currently, an operator or builder looking to construct a Green House model campus can’t get financing through HUD, according to Ryan.

“Most of our folks are nonprofits, they’ve used tax-exempt bonds,” said Ryan. “We’ve had a few do the incentive thing — USDA financing for rural areas has enabled the project to go forward because of that new market tax credit, but the overwhelming majority have either used conventional banks or tax-exempt bonds.”

Only about 2% of the country’s 15,000 nursing homes are classified as a small home model, Kramer and his co-authors noted in the Health Affairs piece. HUD would need to make this model more appealing to lenders, Thurman said, with how long it takes to lift such projects off the ground and costs involved.

Greystone is in talks with HUD and a client, Thurman said, to discuss the possibility of originating some sort of financing for a portfolio of small home plans in order to mitigate risk in the underwriting.

“HUD hasn’t gotten their head around the ability to do a construction loan for more than one [small home] site that’s not contiguous,” Thurman said.

Thinking about the big picture, Ryan said CMS and HUD need to start potential expansion through a “score card,” thinking beyond private rooms and creating smaller households – it’s more about connecting the workforce.

“That’s where you get into the Biden reform agenda. It’s where you get into the NASEM report. Looking more holistically at improving quality in nursing homes, you’ve got to take a look at how we’re financing it and funding it,” she said.

Reliable Internet access and speed, let alone remote patient monitoring or streamlined data records, is a major barrier for rural operators especially, Kramer said. It’s another obvious incentive to add to HUD financing.

Another area, as the sector moves more and more toward value-based care, is to invest in good data and good analytics available in real time.

“Another barrier there is investment in the technology and the data platforms by skilled nursing providers,” said Kramer. “That’s an investment, where are the dollars going to come from?”