Reconsidering Reimbursement: Medicare Advantage Plans Gain Momentum

It is no secret that long-term care facilities rely heavily on government reimbursement programs, such as Medicare, to keep the residents well-cared for and the doors open. As such, any change to reimbursement rates and structures can have profound effects on senior living facilities across the country. Below, we take a look at the recent growth in Medicare Advantage (MA) plans and examine how long-term care facilities are dealing with the changes.

Medicare Advantage programs are built on a framework that emphasizes savings and lowering prices for consumers. Common terms for this concept are value-based-purchasing or value-based-pricing (VBP). Many industry experts predict that these VBP products ultimately may push patients away from skilled nursing facilities (SNFs) and toward less expensive home health or assisted living (AL) options.

Currently, approximately 33% of Medicare participants are enrolled in managed MA plans. However, experts who spoke at the recent National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum expect that number to increase. The Congressional Budget Office has predicted MA plans will grow by approximately 4% per year, although some experts predict that rate will be closer to 7%.

According to data from the Kaiser Family Foundation, over the last decade enrollment in MA plans has grown from 9.7 million enrollees in 2008 to 19 million enrollees in 2017 (Figure 1).

Typically, the conversion of traditional Medicare receipts into Medicare beneficiaries enrolled in MA plans results in shorter lengths-of-stay for the facilities. Further, the reduced reimbursement rates put additional pressure on providers seeing MA enrollment increases. We have already seen the negative effects that reduced government reimbursement rates can have, as evidenced by recent high profile examples, such as the bankruptcy filing of ManorCare. The organization blamed shrinking margins on reduced reimbursement rates, low occupancy, and the growing trend of patients using managed Medicare plans as the main reasons for its demise.

Clearly, the surge in MA enrollment is an issue to be reckoned with and one that is not going away soon.

Skilled Nursing

For its part, the skilled nursing industry continues to face operating headwinds, such as increased regulatory requirements, expense and staffing pressure, and reimbursement challenges. One of the biggest changes in recent years has come in the shift away from traditional Medicare reimbursement (fee-for-service) toward privately managed plans, or MA plans, which pay for managed health care based on a monthly fee-per-enrollee.

As reported by the NIC, the growth in enrollees is coupled with all-time low reimbursement rates at $433 per patient day (PPD) through Q4 2017, a year-over-year decline of 2.7% (Figure 2).

This compares to traditional Medicare reimbursement rates of $513 PPD. With 74% of states reporting MA penetration rates of at least 20% of total Medicare beneficiaries (Figure 3), SNF operators will need to employ strategies to drive census and to ensure effective expense management.

Transitional Care

This shift in payer mix can also have major implications for shorter-stay SNFs, sometimes referred to as “transitional care facilities” or “short-stay facilities.” Such facilities focus on providing comprehensive, short-term rehabilitation services for high-acuity residents. As a result, the skilled-mix (i.e., the total number of Medicare and managed care residents divided by the total number of actual patient days) is much higher for these facilities than they would be for a typical SNF.

Further, as the facility type name would indicate, the average length-of-stay at such facilities is often much shorter than that at a typical SNF. Athough a higher skilled-mix can lead to a higher reimbursement rate, due to the higher acuity of the residents, the shorter length-of-stay forces a transitional care facility to consistently enroll new patients in order to maintain its census needs.

On the expense side, these types of facilities face different cost structures than SNFs. For example, while general routine services remain similar relative to traditional SNFs, the level of therapy and ancillary costs can be much higher. Thus, overall, the inherent design of short-stay facilities leaves them more exposed to bottom-line variation in regard to the current trend of enrollment shift from Medicare to MA.

By way of illustration:

  • Medicare Advantage reimbursement rate is, on average, 13% lower than traditional Medicare;
  • Medicare Advantage average length of stay is 19 days versus 23 days for traditional Medicare;
  • And if we assume that the short-stay facility has a skilled-mix of 80%, versus a traditional facility skilled-mix of 30%.

In that scenario, for every 25% shift from Medicare to MA (meaning Medicare would shift from 100% of revenue to 75%), a short-stay facility would have to add seven additional MA residents to maintain its revenue levels. On the other hand, a traditional SNF would only need to add three more under a 25% shift to MA. This hypothetical example uses data from this report to illustrate that if the operator was unable to increase its MA census, it would experience a 7% to 21% decline in revenue (Figure 4).

How Providers Can Prepare

What does this all mean? Perhaps most importantly, any skilled nursing provider interested in offering a transitional or short-term product must study the population of potential residents in the area. Doing so will help determine if the population is large enough to support the resident turnover of such facilities. The shift towards more MA enrollees only heightens the importance of this piece of due diligence.

As long as the health care industry continues to focus on better value, broad access to plans, and cost-effective care—the rise in popularity for privately managed plans is sure to continue. According to the Centers for Medicare & Medicaid Services (CMS), 99% of Medicare beneficiaries have access to an MA plan. In 2018, CMS projects that average monthly premiums for MA plans will decrease by approximately 6% and more than three-fourths of MA enrollees in their current plan will have the same or lower premiums in 2018. Lower deductibles are another attractive aspect of these plans. However, on the negative side, the emphasis on shorter stays likely will lead to less therapy time for the patients.

Given the attractiveness and the increasing prevalence of MA, operators will have no choice but to proactively manage their resident population to mitigate the risks of lower reimbursement and shorter average lengths-of-stay.

In the May edition of The Capital Issue, we will continue this conversation with help from Kim Saylor, vice president of Concept Rehab, a rehab services provider in Toledo, Ohio. Saylor has seen operators effectively manage these risks and will share a variety of strategies that can be considered when adapting to the changing reimbursement environment. Considering that she reported seeing a “42% increase in the amount of managed care treatment minutes we delivered nationwide in 2017,” she will undoubtedly have a great deal of valuable insight to offer on this important topic.

 

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About The Authors

Bradley Granger
Vice President

Bradley Granger

Vice President

Bradley Granger is a vice president, operational and clinical underwriting with Lancaster Pollard, a financial services firm based in Columbus, Ohio, that specializes in providing capital funding to the senior living and health care sectors. In addition to underwriting tax-exempt and taxable bond offerings, Lancaster Pollard provides organizations a complete range of funding options through its Fannie Mae/FHA/GNMA/ USDA-approved mortgage lender subsidiary. It can also provide bridge-to-agency lending, private equity, balance sheet lending and investing, and M&A services.

The Clinical Risk Group significantly enhances Lancaster Pollard’s ability to analyze and assess risk factors in senior care facilities and to pass that knowledge on to our clients. Brad also assists clients in developing business opportunities relating to improving managed care relationships, hospital referral patterns and reimbursement enhancement.

The expertise and perspective of the Clinical Risk Group enables Lancaster Pollard to create best-in-class credit narratives and offering memoranda which demonstrate and convey the most thorough understanding of seniors housing and care in the industry. Our clients benefit from more efficient review processes that lead to better outcomes, whether the objective is closing a loan or preparing to acquire or divest an asset.

Post-closing, the Clinical Risk Group works collaboratively with our clients who have obtained debt to proactively address operational benchmarks identified as key success factors. The group continuously monitors various operational characteristics of the facilities in our portfolio, developing benchmarks that identify opportunities for improvement.

Prior to joining Lancaster Pollard, Mr. Granger worked for Ultra Risk Advisors as a vice president and underwriting manager for the long-term care professional liability program. His past experience also includes American Safety Insurance, PointRight Analytics, Inc., Trilogy Health Services and HCR Manor Care, where he was a regional director of operations for nine facilities.

Mr. Granger is a licensed nursing home administrator and licensed property and casualty (P&C) insurance broker. He holds a BSBA in finance from The Ohio State University and an MBA from Franklin University.

Adam Walter
Assistant Vice President

Adam Walter

Assistant Vice President

Adam Walter is an assistant vice president with Lancaster Pollard in Lawrence, KS. He is responsible for financial modeling and valuation, credit analysis, interaction with all funding participants and coordinating the closing process. He earned both his bachelor of business administration degree with emphasis in finance and entrepreneurship and a master’s of business administration from the University of Iowa. He is licensed through FINRA and MSRB, holding series 52 and series 79 certifications.

Husam Atari
Associate

Husam Atari

Associate

Husam Atari is an associate with Lancaster Pollard in Columbus. Previously, he worked in investment research and on the project finance team at a leading Jordanian law firm. Husam holds a BA in Political Science from the University of Iowa, a JD from the University of San Diego School of Law, and an MBA from the University of Iowa. At Lancaster Pollard, he is responsible for financial modeling and valuation, credit analysis, interaction with all funding participants and coordinating the closing process. He holds Series 79 and Series 52 licenses.

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