The nursing home industry is undergoing a turbulent period marked by economic, operational and regulatory challenges, according to CliftonLarsonAllen (CLA).
CLA’s latest report on the sector underlines the state-specific instability and disparities that are currently impacting SNFs. CLA researchers said over the past three years, there has been a steady rise in expenses at a national level, with Per Patient Day (PPD) expenses increasing by roughly 15%.
The largest expense item for a skilled nursing facility is labor, which can vary greatly from state to state, depending on wage rates and utilization of contract labor, Cory Rutledge, CLA’s Chief Assurance Officer, told Skilled Nursing News.
“Our analysis shows that states with higher increases in PPD costs are experiencing some combination of higher wage inflation and greater use of contract labor,” he said.
Yet this three-year median change varies drastically among states – for example, Illinois’ three-year median change in expense PPD is 26%, compared to Colorado at 7%.
Labor costs continue to surge and, along with availability, have had a significant impact on the industry, CLA researchers said.
“Total nursing average hourly wages increased 14.7% in 2022, compared to increasing 8.8% in 2021 and 7.4% in 2020,” researchers wrote. “Nursing contract labor hours as a percentage of total nursing hours increased to 10.2% in 2022, compared to 5.3% in 2021, and only 2.9% in 2020.”
Interest rates are also a factor, with the industry currently in an economic environment with the highest interest rate levels since 2001.
Rutledge said higher interest rates make it increasingly difficult for facilities to invest in larger capital projects, such as room renovations, updating heating and cooling systems, and the like.
“Facilities that are aging and less attractive to potential residents and their families may be hard pressed to make the investments needed to be relevant in today’s market because they simply do not have the money, nor can they afford to borrow the money in today’s higher interest rate environment,” he said.
Rutledge said some facilities may have variable rate debt, meaning that the interest rate on the long-term debt changes from time-to-time. Facilities that are facing an interest rate reset will see their monthly mortgage increase, which may be unaffordable given their current economic situation.
Given this environment, facilities are putting off refurbishing properties and even some planned expenses.
“Strategies that SNFs are deploying are simple – they are tightening their belts and spending less,” he said. “This may mean that planned capital expenditures such as new furniture or floor coverings may need to wait.”
Industry volatility and state-specific instability
Furthermore, the report highlighted the divergent margin trajectories across states, with some states facing erosion in operating margins while others respond proactively to challenges.
For example, some states, such as Pennsylvania, Texas, Illinois, Missouri, and North Carolina, are responding to unsustainable economic trends by adjusting Medicaid rate methodologies and rebasing rates.
“Understanding changes, what levers are available to pull, and how rates are influenced is crucial to obtaining appropriate reimbursement,” researchers wrote.
As far as Medicare Advantage goes, for providers focused on capturing episodic patients, reimbursement per patient is likely being impacted downward, as MA plans typically reimburse less than Traditional Medicare FFS, researchers said.
“Overall average length of stay (ALOS) is likely compressed as well,” researchers wrote. “Consider a state like Michigan with 56% MA penetration and an ALOS of 32, compared to Nebraska with 29% MA penetration and ALOS of 59.”
National bed availability is diminishing, according to the report, but the extent of the reduction varies by state.
Operating Margin and PHE funds
In 2022, SNFs experienced a challenging -0.6% operating margin, which worsened to -3.6% when the Public Health Emergency ended.
Expenses in 2022 saw a substantial increase, outpacing revenue growth and leading to a margin deficit. Key factors driving this trend include labor costs, interest rates, and inflation. Labor costs, in particular, surged significantly, with total nursing average hourly wages increasing by 14.7% in 2022.
Rising inflation, with a peak consumer price index of over 9% in 2022, has placed additional financial strain on SNFs. This is particularly challenging in states with Medicaid rates lagging behind current costs. High interest rates have made it difficult for SNFs to make essential investments in infrastructure and technology, researchers said.
Minimum Staffing Requirement proposal
The report also touched on the minimum staffing requirement, which CMS proposed in September.
The proposal calls for Medicare and Medicaid-certified nursing home to provide a minimum of 0.55 hours of care from registered nurse per resident per day and 2.45 hours of care from a nurse aide per resident per day, with non-rural nursing homes having 3 years and rural nursing homes have 5 years to meet these standards.
“The proposal lacks funding for the necessary hiring of thousands of workers, despite CMS recognizing that over 75% of nursing homes would not meet the proposed minimum staffing levels,” researchers wrote.
Rutledge said the only viable funding source is state Medicaid systems.
“With that payor responsible for 62% of all skilled nursing days, there is no other party that is a viable option, particularly when no other single payer source has more than 10% of the skilled nursing days,” he said. “That said, each state sets their own Medicaid system, so there would have to be some Federal requirement forcing the funding, and there would likely be legal challenges to that scenario.”
