CMA Alert – October 4, 2018

– top –

Study: Three-Day Hospital Requirement for Post-Hospital Care In a Skilled Nursing Facility Increases Medicare Costs

In order to qualify for Medicare Part A coverage of a post-hospital stay in a skilled nursing facility, the traditional Medicare program requires that the beneficiary first be hospitalized as an inpatient for three consecutive days, not counting the day of discharge. This requirement has been in place since the Medicare program was enacted more than 50 years ago, when the length of stay in an acute care hospital for people age 65 and over was 13 days.[1]  Today, the average length of stay for all patients is less than five days.[2]

The Improving Access to Medicare Coverage Act of 2017 (H.R. 1421, S.568) is federal legislation that would count all time spent in a hospital – whether inpatient or outpatient “observation.”[3]  Although there is strong bipartisan support for this pending legislation,[4] the Congressional Budget Office (CBO) has not given the bills an official “score” – meaning that the CBO has not determined how much the legislation would cost. Congress generally wants legislation to be “paid for” and will not pass a bill unless it has been scored by the CBO.

A new study of the three-day requirement finds that the three-day inpatient hospital requirement increases Medicare spending by adding costs for both skilled nursing facilities and rehospitalizations.[5] The analysis is based on 2.9 million inpatient hospital discharges in four states (Arizona, Florida, New York, and Washington) between 2004 and 2013.

The Center for Medicare Advocacy questions some of the statements and assumptions made in the research – e.g., that patients may prefer to go to a skilled nursing facility for unnecessary care because the care is “free.” Nevertheless, the analysis provides support for the conclusion that the three-day inpatient requirement, by itself, imposes costs on the Medicare program that may not be necessary. 

Certainly medical care in 2018 is different from medical care in 1965 and health care conditions that required extensive hospitalization 52 years ago may be treated quite differently today. Medicare Advantage plans are permitted to waive the three-day hospital requirement and many demonstration projects similarly waive the requirement, although the Medicare Payment Advisory Commission is (inexplicably) considering a recommendation to add an inpatient hospital requirement to all post-hospital settings.[6]

Who Owns Nursing Facilities and Why?

In September 2007, The New York Times published a lengthy investigative article about private equity’s purchase of nursing facilities – “At Many Nursing Homes, More Profits, Less Nursing.”[1]  The Times reported that private equity firms purchased facilities and divided ownership into multiple companies, insulating themselves from private litigation and meaningful regulatory enforcement. Meanwhile, the firms cut staff and quality of care for resident declined further. Deaths and lawsuits were the result. The chief example (and only company that would talk to The Times) was Formation Capital, which purchased Florida nursing facilities. Formation’s CEO Arnold Whitman told The Times, “‘Lawyers were suing nursing homes because they knew the companies were worth billions of dollars, so we made the companies smaller and poorer, and lawsuits have diminished.’” The article ends with the report that, after four years, Formation sold the Florida facilities for a profit estimated to have been more than $500 million.

Outraged by the investigative report, Congress held hearings and developed legislation on accountability and transparency, which were incorporated into the Affordable Care Act (ACA).[2] The ACA’s transparency provisions have not been implemented. The law required that the statutory provision become effective one year after publication of final rules. CMS issued weak proposed rules[3] (essentially copying the language of the statute and asking members of the public how to narrow the scope), but it never issued final rules.[4]

So Where We Are Today?

On October 1, 2018, Skilled Nursing News reported that a new joint venture between Fundamental Advisors LP and Senior Care Development has “an eventual goal of snapping up $1 billion in skilled nursing assets.”[5]

Senior Care Development’s website includes a section called “SNF Investments” that states in full:

There is a natural progression from developing the full continuum of senior care facilities to acquiring and investing in them. SCD has done so selectively and successfully—often against prevailing industry opinion—while maintaining vigilance toward turnaround opportunities. We know how to interpret the underlying issues, jump on before the bandwagon rolls, and step off before it pulls up short.[6]

Such was the case in the following transactions.

One of the four transactions was 175 Southeast Nursing Homes, described as follows:

175 Southeast Nursing Homes
Acquired below market, reorganized and restored to profitability, then resold at double the purchase price.

A perfect example of investing "against the grain" occurred when large numbers of Florida nursing homes, under the financial pressure of an overheated insurance liability environment in 2001 and 2002, became available at depressed values. Through its separate affiliated company, Senior Care Holdings LLC, SCH joined with and invested in Formation Capital LLC-sponsored projects and, over the next few years, acquired more than 175 nursing homes with over 21,500 beds in 19 states. Industry insiders were quick to scoff, but not for long. By separating ownership of the real estate from the operating company, the investment group was able to contain patient liability and restore profitability—creating nothing less than a paradigm shift in the nursing home industry. Subsequently, the revalued portfolio was sold to GE Capital in 2006 for approximately $1.4 billion, more than twice the original purchase price.[7]

The New York Times underestimated slightly how much was made from the sale of the Florida nursing facilities after four years – it was closer to $700 million than $500 million.

Conclusion

Clearly, and unfortunately, nothing has changed since The Times’ investigative piece more than a decade ago. The accountability and transparency provisions of the ACA have not been implemented. But even if they had been, transparency is not a sufficient response to problems related to nursing home ownership. 

The 1987 Nursing Home Reform Law describes the broad “duty and responsibility of the Secretary:” 

It is the duty and responsibility of the Secretary to assure that requirements which govern the provision of care in skilled nursing facilities under this subchapter, and the enforcement of such requirements, are adequate to protect the health, safety, welfare, and rights of residents and to promote the effective and efficient use of public moneys.[8]

The government has met neither its duty nor its responsibility to residents and taxpayers. We call on Congress to act to ensure that state licensure and federal certification are given only to owners and managers that provide high quality care to residents.