It is a cliché that if you are unable to define the problem, you can’t find a solution. The growing number of nursing home closures is widely recognized as a problem, and yet because the “problem” has not been defined correctly, the solution is still not at hand.

It’s time for some “tough love” about nursing home closures, and a clear program for recovery.

Recent articles in McKnight’s Long Term Care News and  the The New York Times have highlighted the closure of nursing homes, with the focus on the social impacts, (disruption of families) and the economic effects (loss of jobs). All of this is inarguable.

However, another theme in these articles is the suggestion — even the outright claim — that state Medicaid agencies and Medicaid payments themselves are to blame for these closures.

This is just not true.

The story behind nursing home closures goes back to the 1980s. The reasons nursing homes close has less to do with Medicaid rates, and are more related to the size of the market, the unattractiveness of the product itself and the bizarre, “secret” cross-subsidization by Medicare. Increasing labor costs have contributed to the problem, but these are not the root cause. If frontline workers’ wages were adjusted in many marketplace areas, many nursing homes would still not be able to survive.

The reasons are clear and have been conveniently ignored or overlooked for three decades.

Size of the market: Waiting for the silver tsunami

Very often in the popular press, and even in trade publications, evidence for nursing home demand is reported as the number of people turning age 65. Certainly, the leading edge of baby-boom generation are crossing this imaginary threshold. However, this does not signal increasing demand.

The average age of admission to a nursing home is roughly 87 years. Instead of looking at the 65-plus population, a more nuanced and critically important analysis of the 85-plus population shows that this age cohort has actually been shrinking in most marketplace areas. When the 85-plus population is reported as a percentage of the total population, or as a year-over-year increase, the numbers are impressive.

The 85-plus age cohort, year-over-year is increasing, and the size of the cohort as a ratio, compared to the general population is also increasing. However, as Benjamin Disraeli famously said, “There’s lies, damn lies and then there’s statistics.”

As a percent, the 85-plus cohort may be growing, but in most marketplace areas the actual number is declining. The reason for this isn’t declining survival (this is improving); it is because from 1925 to 1945 most locations in the United States experienced a decline in live births due to both the Great Depression and the dustbowl. Just ahead of the projected increase in the number of the 85-plus population (around 2031) we will experience a decline in the size of the so-called age qualified population.

This so-called “demographic dip” or “birth dearth” is real and is having an impact on the scale of demand for seniors housing and services of all types. Careful analysis of most marketplace areas will show this pattern of demand.

So, you can wait for the silver tsunami, but it’s going to be a long wait.

What condition your condition is in

Kenny Rogers famously sang, “I just checked in to see what condition my condition was in.” If Kenny checked most SNFs, he would find their condition is deplorable.

The principal portion of nursing homes in the United States was built between 1965 and 1985, and certainly since the Balanced Budget Act 1997, there have been very few new nursing centers built. Capital investment and refurbishment have lagged well behind any industry standard. (Can you imagine staying at a Hilton that was built in 1965 and has had no significant capital improvements since? You get the picture.)

Meanwhile, beginning in the early 1990s, a new, more flexible inventory of age-targeted congregate housing has been developing. Assisted living, or purpose-built independent living has absorbed almost all the age-qualified demand in the upper income tiers in many marketplace areas. Historically, nursing centers had used so-called private pay patients to cross-subsidize the means-tested Medicaid beneficiaries who were residents. But with the development of attractive, purpose built assisted living residences in many marketplace areas, well-to-do seniors, and or their well-to-do adult children now have an alternate to the all-too-often grim prospect of months or years in a cinderblock, poorly ventilated, institutional nursing center.

In part because of this, relocation to a nursing home is not only viewed negatively in society at large but is seen as a fate worse than death. Attempts to counteract this deep negative cultural metaphor have, so far, been unsuccessful.

So, the “problem” isn’t Medicaid; it’s the size of the age qualified market, and the deplorable condition of the product. Is there anyone who wakes up in the morning and says, “Great,  I’m moving to a nursing home today!”?

And what about the money?

The Medicare Subsidy: Profit seeking

Over half of all nursing home residents nationally are Medicaid beneficiaries, while roughly only 11% are paid for through Medicare. For decades, the small percentage of highly reimbursed “Medicare mix” subsidized the majority of poorly reimbursed Medicaid. This “secret” cross-subsidy between government programs was not discussed openly but was widely recognized within the sector as a linchpin of many nursing homes’ financial survival.

Some nursing homes became proficient at profit-seeking through admissions and payment-mix management, and therefore became quite profitable. This attracted capital investment in the real estate at scale, and some of the resulting organizations became quite large. Unfortunately, this investment didn’t include substantial improvements to the infrastructure — the buildings themselves.  Refurbishments were not significant; a coat of paint and some new lighting was the extent of the updates. The rest went to pay land-leases and operating profits. This profit-seeking was rational and to be expected. In this context, Medicaid “unit losses” were accepted, and Medicare, or other payor-category profits, were the driving business goal. This went on for decades.

Fast forward to 2010, when the nursing home-Medicare lifeline started to be squeezed by CMS,  as it sought to eliminate waste and control variability in the Medicare program. The result is that both utilization of, and payments for, Medicare beneficiaries in nursing homes is declining. Draining the Medicare profit from the nursing home pool exposes the underlying economic underpinnings — and they’re quickly rotting.

On the face of it, this “secret” intergovernmental subsidy with the nursing home in the middle is irrational from an economic, fiscal or program perspective. But as has been said before, “Who knew it was this complicated?” The typical nursing home loses money on every Medicaid patient (and that’s 60%-plus of the population) and makes up for these losses by realizing operating margin on every Medicare beneficiary. The declining use of nursing homes as postoperative rehabilitation destinations, and the increase in various managed care organizations, like Medicare Advantage within the Medicare program, have reduced both utilization and the program payments.

The net of this is that nursing homes are caught in the middle and have no way to adjust for the losses. Given this context, it is convenient but ingenuous to “blame” Medicaid for nursing home closures.

Labor market competition

In the United States (and many other developed economies) labor market competition has been heating up for the past six or more years. This post-recession economic recovery has been the longest on record. The typical result of such tight labor markets is increasing wages.

Recent evidence of this can be seen everywhere: from the Stop & Shop strike to home health workers organizing in New York. In many ways, a nursing center’s ability to compete for front-line workers is hamstrung by lags in regulatory adjustment to wages. Labor rates have historically been set for frontline employees in nursing centers by government reimbursement rates, since 70-plus percent of nursing home costs are labor. State funded Medicaid payments have been painfully slow to catch up with changes in the labor markets.

Creating a more responsive wage adjustments scheme would help many nursing centers, and may even forestall certain nursing home closures. But this alone is a very tentative thread for any nursing center to hold onto. The underlying market forces are running against this segment of the post-acute care sector.

Recovery: What’s needed

It is evident that nursing homes are an essential component of a comprehensive, rational care delivery system across the United States. Squeezing nursing centers indiscriminately and tolerating nursing home closures is as irrational as the “secret” intergovernmental cross subsidization (see above).

What’s needed is a rethink of our highly fragmented, dysfunctional patchwork of age-qualified congregate residential, and community-based services; so little of what is now in place makes any sense at all! There is an opportunity — even an obligation — for leaders in the sector to step up and drive a change agenda that acknowledges the realities, while envisioning a collaborative system, encompassing congregate and community-based providers including pharmacy, nursing, the full array of allied health, long-term supports and services, housing and care. These models are available.

An appropriate response requires dramatically rethinking the existing Stark regulations, and the tangled skein of regulations that inhibit and, in some cases, render illegal, the needed cooperation between and among providers who must collaborate for the well-being of the targeted populations. This collaboration should include the roles of public health departments and case management.

Long-term care professionals didn’t invent public health, although recent discussions about “social determinants of health” would suggest as much. There are hundreds of years of experience available in the disciplines of public health, and these scientific insights must be selectively applied for the health and well-being of our age qualified markets going forward. And the incentives of intermediaries (CMS, insurance providers and managed care organizations) to control costs and improve outcomes can be brought to bear here, creating virtuous cycles of collaborative experimentation and evaluation. But we must move past the legacy constraints of our fragmented, dysfunctional payment and regulatory systems.

The plight of nursing homes is a symptom of market shifts, profit-seeking, and at best neglect, and at worst the abandonment of the aged through fragmentation of the necessary congregate and service needs, and evisceration of our public health systems.

No mysteries here — just a complicated challenge that needs a dramatically new approach.

Irving Stackpole is president of Stackpole & Associates Inc., a marketing, research and training firm. He has more than 40 years of experience in healthcare and seniors housing and services. He can be reached through LinkedIn and at: istackpole@stackpoleassociates.com.