Tipping Point: Nursing home industry faces financial crisis

Rising health care costs and declining Medicaid reimbursements have been major drains on the balance sheets of American skilled nursing homes for some time.

Now, tack on an 11.1-percent cut to federal Medicare reimbursements, which went into effect on Oct. 1, and the nursing home industry is nearing a tipping point.

The financial crisis is forcing Wisconsin’s nursing homes to reevaluate their business models, and the problems could force some of them to go out of business.

The crisis is being driven by a series of societal factors:

The population of aging baby boomers who need care continues to surge, but cuts in Medicaid and Medicare reimbursements result in lower revenues for health care providers, including nursing homes.

The elderly are living longer, but requiring more care, and the costs for that care continue to skyrocket.

The collapse of the housing market has diminished the ability of many seniors to use their homes to finance their elderly care.

Many seniors are outliving their financial resources to pay for their elderly care.

A survey by the Alliance for Quality Nursing Home Care shows the recent Medicare reimbursement reduction will result in at least 20,000 potential job layoffs and prevent the creation of another 20,000 new jobs in skilled care nursing facilities nationwide.

“It is a financial crisis for the industry — there is no question about it,” said Scott McFadden, chief executive officer of The Lutheran Home and Harwood Place in Wauwatosa.

More than half of The Lutheran Home’s 120 permanent residents are on Medicaid, and the business has been losing significant revenue on caring for those patients for years, he said.

“We’re not alone in that — most of our peers are going through the same thing,” McFadden said.

Nursing homes in Wisconsin experienced the sixth-largest gap in the nation between the cost of care and reimbursements for Medicaid patients in 2010, according to Eljay LLC, an accounting and long-term care consulting firm. The average per-day difference was $26.54 — a cost that falls on the nursing home.

“When you get into $30 per day deficits, it’s getting to be unmanageable,” said Rob Schlicht, director of health care consulting at Wauwatosa-based Wipfli LLP.

In the past, nursing homes could depend on a slight increase in Medicare reimbursement each year, which went toward filling the Medicaid gap, Schlicht said. That’s no longer the case.

“The declining revenues are hurting nursing homes in Wisconsin,” Schlict said. “The cost of doing business outpaces the reimbursement that they get from the government.”

Each state has its own formula to determine reimbursements for skilled nursing services, said Bill Mulligan, managing director of corporate finance at Ziegler Capital Management in Milwaukee. He has worked in the industry for 25 years and currently provides fixed rate financing to skilled nursing facilities.

“Medicaid reimbursement has not kept up with inflation, so Medicare utilization has been increasingly important,” he said. “Kind of the saving grace for the nursing homes is Medicare utilization has gone up significantly.”

The recent cut was a drastic change, so it drew sharp criticism, Mulligan said.

Since skilled nursing facilities lose the most on Medicaid patients, some are trying to attract more private pay patients through assisted and independent living communities, said Romy McCarthy, director at Ziegler.

Other nursing homes have reduced bed numbers, merged, sold the business or closed their doors as a result of consistent Medicaid shortfalls, she said.

“A lot of organizations are revisiting, ‘Is it viable for me to be in this line of work?” McCarthy said. “If they can’t even break even, how will they survive going forward?”


Severe shortfalls

But private pay cannot make up the whole budget shortfall, according to said John Sauer, executive director of the Wisconsin Association of Homes & Services for the Aging.

“You can only shift so much cost onto private payers, or it just makes nursing home care unaffordable to most people,” Sauer said. “Many organizations are really looking at any way they can in order to operate more cost effectively, looking at other revenue potentials that might be out there, and continue to look at cost shifting.”

McFadden anticipates The Lutheran Home can expect a $750,000 shortfall on its $21 million annual budget as a result of the Medicare reimbursement reduction.

In addition, the facility must make a capital investment this year to update its elevators to state and Centers for Medicare and Medicaid Services fire codes. That project will cost about $300,000, he said.

“The last couple of years have been tough, but prior to that we performed a lot better than our peers, so we’re using our reserves to offset that,” McFadden said.

The Lutheran Home is currently reviewing the entire organization, top to bottom, to find other cost savings. McFadden said he is not sure yet how the Medicare cut will affect long-term financials.

Staffing cuts are an option, but having fewer caretakers has a direct effect on resident care, McFadden said.

“Is this business model and our industry, is this sustainable? We’re analyzing that right now,” he said. “I’m not sure. Less money isn’t going to improve the quality of care, that’s for sure.”

Other income streams, such as foundations and assisted living communities, can help balance out underfunded nursing home care for many skilled nursing facilities, Sauer said.

“There’s been such a tremendous increase in the number of assisted living units in the state of Wisconsin that what we’re finding is the role of the nursing home is changing over the last 10 years,” he said.

Many nursing home admissions are now for short-term rehabilitation care, Sauer said. Memory care units at some skilled nursing facilities provide minimal medical care but help residents who have Alzheimer’s or other memory loss with daily tasks.

However, when the costs for private pay patients go up, their resources are depleted more quickly, speeding their route to Medicaid Title 19, said David Keller, president and CEO of Luther Manor in Wauwatosa.

Luther Manor bills about 11 percent of its patient days to Medicare and 60 percent to Medicaid, so the latter is still of primary concern, he said.

“That’s a much bigger ongoing challenge for us in terms of revenue,” Keller said. “The Medicaid reimbursement rate is much lower than costs.”

The Medicare reimbursement reduction means a revenue decline of about $500,000 per year for Luther Manor, Keller said.

Keller hopes to make up for the cuts through staff hour reductions and by leaving some vacant positions open.

“We’ve been a mission-driven and mission-focused organization for 50 years, and that’s what drives us, so we’ll continue to weather these storms,” Keller said.


Staff cutbacks

The Milwaukee Protestant Home, which operates Eastcastle Place in Milwaukee and Newcastle Place in Mequon, also has focused on its staff expenses to find cost efficiencies, said president and CEO Matt Furno.

Next year’s pay raises have been reduced, and employee health insurance deductibles have gone up, he said.

“You lose your reputation very quickly if you start cutting services or staff,” Furno said. “(So) our employees took the brunt of the hit.”

Furno also is attempting to increase the facility’s market share and patient census numbers.

“Every nursing home is in the same boat, so there’s no such thing as, ‘I just want all the high payers,'” Furno said. “You take what you can get.”

Clement Manor in Milwaukee also is waiting to see how the changes will play out, said CEO Richard Rau.

The business stands to lose about $700,000 in annual revenue for its $22 million budget. Net income for Clement Manor’s independent living community partially offsets reimbursement gaps, but there’s no direct way to make up for the lower payments without impacting patient care, Rau said.

“Our biggest fear right now is that with the state’s potential for additional cuts … it’s going to put nursing facilities in a severe financial situation,” Rau said. “There’s only so much you can do, and we’re not about to do anything that would negatively impact the patients.”

Rau hopes to increase occupancy as much as possible, into the high 90-percent range, to draw in more revenue. He is still evaluating other options to balance the budget.

As for the future, the industry will need to adapt and become more efficient. Some nursing homes, especially those with a majority of Medicaid patients, may close, Rau said.

Fewer nursing homes in the market could mean capacity problems, Rau said, especially as the elderly population will only rise as the baby boom generation ages. The nursing homes that are able stay in business could be of lower quality, since wages and salaries are likely to be reduced.

St. Ann Center for Intergenerational Care in Milwaukee is not a traditional nursing home, but it does receive reimbursement from the state’s Family Care program, said president Sister Edna Lonergan. Family Care serves adults who have disabilities or need a level of care similar to that of a nursing home, and also meet Medicaid income and asset limits.

St. Ann provides daycare services for both children and adults. Seniors at the center have access to skilled nursing care, personal care, two feedings, oxygen care and social and recreational activities for about $50 per day, Lonergan said.


Desperate measures

A recent enrollment freeze on the Family Care program has put some applicants on a waiting list. St. Ann Center tries to raise money and provide care to help those on the waiting list until they are approved to attend the adult daycare, she said.

According to the Wisconsin Department of Health Services, the actual growth in the Family Care waitlist since the July freeze was 853.

“People can’t wait to have their basic human needs cared for,” Lonergan said. “I’ve even raised gerbils and sold them. I have made cookies, I have made jam. Everything I could think of to raise money so that we could take people who are on the wait list.”

The recession has not been kind to the skilled nursing industry or its patients, which compounds financial difficulties.

Seniors who planned on selling their homes and moving into skilled nursing or assisted living facilities have been hit by the real estate market decline, said Jay Adkisson, a partner at Wipfli. Some were relying on a higher selling price to finance their health care, and many can’t sell their homes at all.

There has been an emphasis on keeping seniors out of nursing homes until absolutely necessary to cut back on costs, he said. But that can actually end up being more expensive if medical conditions worsen at home.

The Medicare cuts have forced nursing homes to look for other revenue streams and find a private payer balance, Adkisson said. While some facilities could struggle or close, the newfound efficiencies could keep others afloat.

“Rather than (have nursing) homes go out of business, they could be sold to large for-profit groups,” he said.

“There are going to be facilities that are going to go out of business,” Rau said. “There’s only so long that you can sustain losing money.”



Federal shortfalls

Medicare is the federal health care program for elderly Americans. Medicare does not pay for the largest part of long-term nursing home care, but does pay for short stays in nursing homes, such as when patients need skilled nursing care after being hospitalized. Medicaid is a federal and state-funded program providing health care, including long-term nursing home costs, for low-income people.

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Molly Dill, former BizTimes Milwaukee managing editor.

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