Replacing the Affordable Care Act (ACA) with the Republican’s American Health Care Act (AHCA) has been a great disruptor in the seniors housing M&A space. Skilled nursing facilities in particular are in for many changes under the Trump administration. Medicaid block grants have been feared by the skilled nursing industry because providers assume that when states get access to the full funding to do as they like, they will divert a higher proportion of the funding to other areas besides skilled nursing. Skilled nursing facilities, with an average census that continues to decline and is now in the low 80s, still rely on Medicaid to fund more than two-thirds of their population. Despite achieving a record-setting average price per bed for last year ($99,200), there will be little good news for the sector in the next several years.
Unfortunately, we just witnessed one of the biggest dysfunctions of federal government we have seen in years. We are speaking of the inability of the majority party to bring legislation to the floor of the House for a vote to replace the Affordable Care Act (ACA) with the Republican replacement, called the American Health Care Act (AHCA, but not to be confused with the American Health Care Association). The GOP had seven years to get its act together and write legislation that at least its own members could agree on and pass 100% on party lines, much like the Democrats did in late 2009. Something as major as healthcare reform is doomed for failure in the long term if there is zero bipartisan support. The Republicans are beginning to learn this as well.
The ACA certainly had its problems, not the least of which was some of its funding provisions, including the Ponzi-scheme Class Act which was supposed to serve as a type of long-term care insurance, but was to collect premiums for five years, spend it elsewhere to fund the Act while putting none of the premiums into reserves to pay for the eventual claims that would not be eligible for payment for five years. Even the Democrats realized it was financially fraudulent and put up little fight to pull the plug on it a few years later. Perhaps they never read the original bill after it was passed. When some members of Congress don’t understand the major differences between Medicare and Medicaid, we suppose it is too much to ask of them to read and understand all of the provisions of the ACA, before or after they voted on it.
“The ACA’s goal was to find a way to insure more Americans, to make that insurance more affordable and to increase the quality of the health care we receive. In its most simple case, it succeeded.”
The number of uninsured decreased to historic lows, and for those newly insured, it certainly was more affordable than what they could have purchased on their own in the past. That affordability, however, was the result of subsidies and an explosive growth in Medicaid enrollees, and that all came with a cost. In addition, with all the “essential health benefits” (EHBs) mandated to be included in all policies, the cost for everyone else also increased, both with increased premiums but even more so with higher deductibles and out-of-pocket expenses. The concept of “affordability” was in the eye of the beholder, and most people did not think their deductibles were very affordable. And all those newly “insured” on Medicaid were surprised to find out that many providers looked at Medicaid as welfare, and did not want them as patients. Hospitals were perhaps the exception, because now they had an increase in paying patients as opposed to “charity care” of the past.
Some states were reluctant to expand their Medicaid population, because in the past, they always had to pay a percentage of the cost, from 50% of every dollar spent in the richest states to just 26% in the poorest. The federal government paid the rest. With the ACA, the federal government promised to initially pay 100% of the cost for newly eligible enrollees, decreasing to 90% by 2020, so that 10% remainder seemed like a bargain. Governors were forced to explain why they would not take this financial gift from Washington, and it was a hard case to make, at least in the short term. Their poor and downtrodden would get healthcare insurance basically paid for by someone else. And therein lies the problem, paid for by someone else.
Medicaid has become the third largest program in the federal budget, and it has nearly tripled in cost since 2000. It is even larger in state budgets, often known as a budget-buster in past years, and it has become a major spending problem for everyone. As part of the AHCA, the federal portion of Medicaid spending was going to be capped at what each state had received most recently, and then increased by medical inflation.
Known as “block grants” or the new euphemism, “per capita allotments,” this meant that for those 31 states that had expanded their Medicaid program as part of the ACA, their base year would be higher than if they hadn’t expanded Medicaid. For those 19 states that did not expand Medicaid, things were beginning to look a little grim from a budget perspective, and they were going to be left behind in the fiscal dust if block grants came to be. We are also making the assumption that with block grants, the Medicaid provider tax would go out the window which, while as a tax scheme is very helpful for skilled nursing providers to boost a woefully low Medicaid rate, it is itself an absurd fiscal game that masks the real problem.
Medicaid block grants have been feared by the skilled nursing industry because providers assume that when states get access to the full funding to do as they like, they will divert a higher proportion of the funding to other areas besides skilled nursing. And they should be afraid. Skilled nursing facilities have been demonized by some advocates for the elderly, unwarranted as that may be, and the push has been for increased funding for home and community-based programs, not in-patient skilled nursing. Although many people continue to believe at home care is cheaper, the reality is that in most cases it is not. The problem is that everyone wants to stay at home, so the pressure mounts.
Given the high leverage of the skilled nursing industry the specter of Medicaid block grants had some people worrying of a new rash of bankruptcies, or at least a lot of debt and lease restructurings, as skilled nursing facility Medicaid funding declined with the block grants. With the no vote, skilled nursing owners dodged a big one, at least for now. However, with the AHCA postponed or gone forever, Medicaid block grants can still be enacted separately. And with President Trump and Speaker Ryan both saying we are going to have to live with the ACA for now, those 19 states that did not expand Medicaid are having second thoughts. The GOP-led Kansas legislature, over the protests of their Republican governor, voted to expand Medicaid (subsequently vetoed by said governor), and other states are planning to grow their existing Medicaid programs. One, if block grants ever do come into existence, these states want to maximize their base line payment. Two, if it doesn’t, why not take the federal funds under the ACA as long as they last? It just seems to make economic sense. Until it doesn’t.
“The problem is that Medicaid itself is on an unsustainable path. For skilled nursing providers, you have a reimbursement program that, in most cases, does not fully cover the costs incurred to take care of patients.”
So whether we have a future of block grants or not, Medicaid spending is not going to increase enough for skilled nursing providers to help with profitability. The money just does not exist. In addition, even without block grants, the trend is going toward Medicaid managed care to try to contain costs. Managed care plans are not only going to scrutinize Medicaid rates, but they are also going to look at eligibility for skilled nursing care compared with other alternatives, such as assisted living and home health care. With block grants or not, these Medicaid plans will be given a sum of money to care for the state’s Medicaid population, and the less they spend, the higher their profits, and they want to grow their profits without, of course, compromising patient care.
Medicaid now insures more than 72 million people, or approximately one in five Americans. In a half dozen states, the proportion is one in four or higher. At least with Medicare, there is an employee/employer Medicare tax to help fund that program, which is projected to have insufficient funds later next decade to pay 100% of the current commitments made to the elderly. Either benefits will be cut, age eligibility will be raised, or the wealthy will pay a higher share of their Medicare costs. Perhaps all of the above, but not without a fight from the elderly population.
Remember former Ways and Means Committee Chairman Dan Rostenkowski being chased down the street in Chicago when Congress tried to have the elderly pay more for their benefits. The legislation, the Catastrophic Coverage Act, which had already been passed, was quickly rescinded. The act was supposed to expand Medicare benefits, but with a higher payment from the beneficiaries to pay for it. They wanted the benefit, but not the payment. The elderly cohort has done nothing but grow in the past 29 years since the infamous chase scene. Medicaid, however, does not have the constituency with the same kind of power, but Medicaid is the fastest growing government program, so just wait and see what happens in the next economic downturn.
“Skilled nursing facilities, with an average census that continues to decline and is now in the low 80s, still rely on Medicaid to fund more than two-thirds of their population.”
In the past, providers were willing to accept the low Medicaid payments because if they could keep the beds full, the payments at least covered some of the overhead and other fixed costs, and private paying patients and Medicare provided the profits but not the census to cover all costs. Private pay has been on the decline for years, with the easy pickings taken by the growth of assisted living starting 20 years ago, and Medicare has been getting squeezed each year. With Medicare Advantage plans cutting lengths of stay and daily rates, and hospitals discharging more and more patients directly to the home, there has been little to fill the vacuum of census and cash flow. Higher acuity patients can provide some relief, but not all providers can actually do this. And with the new transitional care/subacute care facilities being built, it is making it very difficult for that 40-year-old skilled nursing facility to compete.
So why do we bring all this up at this time? Because there will be little good news for the sector in the next several years. Yes, in theory there could be a skilled nursing bed shortage late in the next decade, but there also has to be funding for those patients to fill those beds. In addition, an increasing number of providers will not be seeking custodial care Medicaid patients to fill their beds. And an increasing number of managed care plans will be looking for alternatives to skilled nursing facilities, as will family members. Meanwhile, those 40-year old facilities will be 50 years old and older, with little appeal to the customer or the payer. Consequently, we see the record-setting average price per bed for skilled nursing facilities last year ($99,200) as a record that will not be broken for a while.
There are two caveats to that prediction, however. First, if the market demand for the older, lower-priced facilities diminishes, and many become un-sellable, with only high quality properties demanded in the market, then by default the average price per bed could continue to rise. Second, if there is a burst in development activity of the new transitional care, non-Medicaid facilities, and these flood the acquisition market, then of course the averages will continue to rise. But we do not see that happening, at least, not until the 2030s or 2040s. The point is that with each passing year, the skilled nursing market will continue to bifurcate between the old and the new, between the custodial care and the transitional care, between the low-profit and the high-profit, and between the unwanted and the most desired.
Skilled nursing providers tend to be shrewd when it comes to knowing how to make money in a very convoluted and highly regulated system, but the system needs money that we just don’t see coming any time soon. And if it doesn’t come, the system will have to change. And when that happens, there will be losers and winners, and it could get very messy.
We should also point out that there is a section of the choir that does not believe we will ever see Medicaid block grants because it would cause such a financial disruption to the skilled nursing facility industry that no one wants to take responsibility for closures, least of all the federal government. With so much HUD debt on the books, the last thing the government needs is an unprecedented spike in HUD defaults. That would certainly send HUD’s profitability down the toilet, not to mention all those HUD underwriters. Medicaid funding is a serious issue for the industry and we just do not see it getting better, block grants or not.