April 22, 2020

If We Had 2020 Vision, What Would Nursing Homes Look Like?

Futurism is all the rage: worn down by the relentless drumbeat of Coronavirus hospitalizations and deaths, the mind-numbing unemployment statistics, and the unimaginable reality of parents trying to work while home-schooling their children, we are beginning to think about life-after-the-epidemic. Will movie theaters survive? Restaurants? What about orchestras and theater companies? Will doctors and researchers fly across the country and even across the ocean to attend conferences? Will anyone ever go on a cruise again? The answers to these questions have implications for how we will live our lives, for the environment, for the economy…the list goes on and on. But today’s NY Times speculates about another possible casualty of the COVID-19 outbreak, nursing homes. Battered by an acute rise in costs together with a precipitous decline in revenue as admissions fall, and shattered by their new reputation as a “petri dish for the worst pandemic in generations,” America’s nursing homes risk going under.

The US currently has roughly 15,400 nursing facilities which house 1.5 million of the oldest, frailest, most vulnerable people in the country. The Centers for Medicare and Medicaid (CMS) calls these facilities skilled nursing facilities; most of the rest of us refer to them as nursing homes. To confuse matters, the majority of these skilled nursing facilities (referred to as SNFs and pronounced “sniffs”) also provide care to another 1.5 million Medicare beneficiaries who are admitted for a short period, typically a few weeks, following an acute hospital stay. They are transferred from the acute hospital for rehabilitation or to complete a course of medical treatment prior to returning home. 

Skilled nursing facilities are paid by Medicare for short-term “post-acute care;” they are paid by Medicaid or privately, by the residents themselves, for long-term residential care. And while the subacute part of the business is profitable—according to the MedPAC (Medicare Payment Advisory Commission) “Report to Congress” just published last month, profit margins are 18 percent—the long-term residential component is not. Profit margins in the residential component are non-existent, with the latest, 2018 figures averaging negative 3 percent. Residential, long-term care SNFS were financially precarious before the COVID-19 epidemic. So, it is not surprising that they are faring especially poorly during the epidemic.
While the major toll, as the NY Times has reported, is the 7000 deaths among a total of 36,500 nursing home residents diagnosed with COVID-19, there has been a huge financial hit as well. One non-profit chain in Minnesota reported that the average 72-bed nursing home has been spending an extra $1922 per day on personal protective equipment for staff members and another $1500 per day for extra staff to care for residents who are in isolation or who are substituting for staff who are out sick. At the same time, revenue is down because facilities cannot fill their empty beds. Nursing homes have large fixed costs to cover salaries for staff, mortgage payments, food, and equipment. What they don’t have is much reserve. 

In light of these statistics, what will nursing homes do? What will happen to the 1.5 million Americans, who live in these facilities today? One way to imagine the future is by looking at the past. And it turns out that once before, in the not too distant past, the nursing home industry experienced a great contraction.

A funny thing happened in the late 1970s and early 1980s. Despite decades of growth of the elderly population and dire predictions about imminent shortages of nursing home beds, the demand for nursing homes fell. It fell because the baby boomers read books like “Tender Loving Greed” by Mary Adelaide (1974) and “Why Survive? Growing Old in America” by Robert Butler (1975) and concluded they didn’t ever want to go into a nursing home. Not only that, but they didn’t want to see their parents enter a nursing home. In response to the growing demand to stay at home and “age in place,” Medicare expanded its home health benefits: federal legislation in 1980 (the Omnibus Budget Reconciliation Act, known as OBRA 1980) relaxed prevailing restrictions on the ability of Medicare patients to receive nursing, physical therapy, occupational therapy, and other services in their homes. 

Then, in the mid-1980s, a new kid arrived on the block. Touted as promoting dignity and fostering independence, the new institution, which came to be called assisted living, was supposed to keep older people out of nursing homes by offering them the help they needed in the privacy of their own apartment. Between 1991 and 1999, the number of such facilities increased by 49 percent. Between 1998 and 2003, the number increased another 48 percent. Fortune Magazine reported that assisted living was a leading growth industry and that Wall Street investors were falling all over each other to get a piece of the action.

As assisted living and home care grew in popularity, the demand for nursing home care fell, relative to the population. That is, the absolute number of nursing home beds continued to increase, reflecting the growth of the older population in general and of the population over 80 in particular. But by 1980, the number of nursing home beds per person over 65 had begun to fall. A study published in 1985 projected the elderly nursing home population would rise from 1.2 million in 1980 to 1.9 million in 1995 and to 2.8 million in 2020. But here it is 2020 and the number of older people in nursing homes is back down to 1.2 million—the same level as 35 years ago.

Did nursing homes close in response to the fall in demand in the 1980s and 1990s? Some did. But many simply retooled. At just about the same time that assisted living began replacing nursing home care for many older individuals, Medicare made a dramatic change in the way hospital care was paid for, a change that would have an equally dramatic impact on nursing homes. What happened is that Congress passed legislation requiring that Medicare bill for hospital care using prospective payment. Accordingly, Medicare introduced the concept of “diagnosis related groups” in 1983, essentially paying a flat fee to hospitals for a given medical problem, say a heart attack or a broken hip, rather than reimbursing hospitals on a per diem basis. 

The implications of this payment model were immediately apparent to hospitals: since the rates assumed an average length of stay for a given diagnosis, any hospital that discharged patients sooner than the average made a profit and any hospital that discharged patients later than average sustained a loss. The incentive to discharge patients “quicker and sicker” was clear. How to do this with older patients, many of whom were weak and debilitated after their acute problem had been addressed, was less clear. 

Enter the skilled nursing facility, aka the nursing home. A little used proviso in the original 1965 Medicare legislation provided for “post-hospital extended care” in a “qualified facility having an arrangement with a hospital for the timely transfer of patients.” When acute care hospitals looked around for a place to which they could send patients (usually older patients) who were well enough to leave the hospital but not well enough to go home, they seized on this clause. Suddenly they saw nursing homes in a new light. Here were medical facilities that provided round the clock nursing care, room and board, and were accustomed to caring for older people. And those nursing homes had empty beds. 

Not only did nursing homes have empty beds but, as they soon learned, they would be reimbursed much more generously by Medicare if they used the beds for “rehabilitative” or “post-acute care” than they would be by Medicaid if they used them for long term care. On average, Medicare today pays $503 per patient per day for SNF care whereas, on average, Medicaid pays $206 per person per day for residential care.  As a result, use of the short-term skilled nursing benefit soared, going from minimal utilization in the 1980s to 2.2 million admissions in 2018, at a cost to Medicare of $28.5 billion. Not surprisingly, almost all skilled nursing facilities now accept short-term patients. A few take short-term patients only. 

So, what can this slice of history teach us about the predicament of nursing homes today? First, odds are that some nursing homes will close. Many of those that close will already have been operating at less than 100 percent capacity before the COVID-19 epidemic. Some will be temporarily bailed out by the large corporations of which they are a part, health care conglomerates that have other revenue streams. But the for-profit owners—and 70 percent of nursing homes are for-profit—will not want to borrow from Peter to pay Paul very long. They will seek to unload the failing parts of their empire as soon as possible. 

Other nursing homes will probably remake themselves. Just as their predecessors moved into the post-acute business from the strictly residential, long-term care business, today’s nursing homes may decide that the money is in the health care sector and not the residential sector. They might build on their “subacute” units—the parts of the skilled nursing facility that provide short-term care are typically physically separate from the remainder of the institution, expanding them and developing new capabilities. It would be a short leap to becoming a low-tech hospital, equipped to care for simple problems that are nonetheless too complex for patients to manage at home, such as relatively mild cases of pneumonia or kidney infections. Just as community hospitals provide some but not all of the services offered by large, tertiary care hospitals and transfer patients from one site to another if additional technologies are required, so too could skilled nursing facilities provide some but not all of the services offered by community hospitals. These new health care entities could be branded “infirmaries” or perhaps even “geriatric hospitals.” 

Acute care hospitals will in all likelihood be happy to see frail, elderly patients admitted to such facilities. They were desperate for an alternative site of care during the COVID-19 outbreak, either to house COVID-19 patients who did not require an ICU or to house hospitalized patients who had problems other than COVID-19. In the pre-COVID-19 era, they lost money on such patients because they often developed complications—falls, adverse drug reactions, acute confusion—that prolonged their hospital stay. 

What about the patients themselves? Where will they go if their nursing home goes bankrupt? After the dismal performance of the country’s nursing homes during the COVID-19 outbreak, some of which was preventable and some of which may well not have been, nursing home residents and their families will be very interested in moving to a different site of care. This will be challenging since today’s nursing home population is tremendously needy.

According to the most recent data, 41 percent of nursing home residents are dependent in four very basic daily activities such as bathing, dressing, or feeding themselves. Another 22 percent are dependent in five or more basic daily activities. In addition, cognitive impairment is widespread in nursing homes, with 24 percent of residents diagnosed with moderate cognitive impairment and 37 percent with severe cognitive impairment—where “severe” means profound limitations in communication and mobility and total dependence on others for personal care. Nonetheless, some nursing home residents will move to assisted living complexes. These facilities, which over time have come to serve an increasingly impaired population, will need to adapt to a still needier clientele. 

Other nursing home residents will move to the surviving conventional nursing homes, where they and their relatives will apply pressure to develop models of care that are fiscally sustainable and, at the same time, focus on supporting those capabilities that remain as well as compensating for those that have been lost. 

Change is often difficult and transitional periods are often marred by missteps. But if we learn from past mistakes and if we focus on what’s best for the oldest and the frailest among us, the almost inevitable shake up in the nursing home industry just may prove to be a good thing.

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