Skilled nursing facilities across the United States continue to face daunting challenges. The average SNF is only able to break even, reflecting increased competition, upward wage pressure in a tight labor market, and the preponderance of low-paying Medicaid patients. In many regions, operating margins are negative, suggesting that more facilities will soon be forced to close or raise rates.These are some of main findings of Plante Moran’s third annual “Make the Mark” Benchmarking report that allows around 15,000 Medicare-certified SNFs to benchmark their key operating, revenue and expense metrics. This year’s report is our most robust yet, benefiting from a richer data set that enables it to paint a more detailed profile of SNF facilities across the country. This year we incorporated Medicare claims data along with CMS cost report data to provide more meaningful information about the dynamics impacting SNFs.
Despite this challenging environment, however, our report identifies new or existing opportunities for enterprising SNFs. The introduction of the Patient Driven Payment Model (PDPM) and the relative profitability of Medicare patients provides incentives for operators to specialize in more complex clinical conditions and more creative forms of reimbursement structuring.
The following are five key takeaways from the report.
– The decline of rehab. The SNF resident profile is shifting away from traditional rehab patients and towards those with more complex clinical conditions. This reflects the transition from the Medicare PPS payment system, with its focus on compensation for rehab therapy hours, to PDPM, which came into effect last October. The report found that rehab-oriented diagnoses accounted for only 25% of hospital discharges to SNFs. The most common diagnoses for patients discharged to SNFs were those related to septicemia (38%), whose patients have the longest hospital stays at 8.25 days. By contrast, rehab patients only spent an average of 3.8 days in hospital, reflecting medical advances that have reduced the complexity of procedures like hip and knee replacements. I’ve written recently about how SNFs need to respond actively to the challenges and opportunities presented by PDPM. The shifting patient profile highlighted by our benchmark report further underlines that point. By taking steps to improve their competencies around more complex conditions like infections, SNFs can offer to reduce the length of hospital stays and win more referrals.
– The growing importance of diversification. The report finds that about 1 in 5 Medicare beneficiaries are admitted to a SNF following a hospital stay and that SNFs account for $28 billion in Medicare payments. But with the Medicare budget set to shrink further, providers may soon be hostage to a continued decline in payment rates if they don’t work to claim a bigger piece of the pie. That underlines why we’re seeing more SNF providers look seriously at risk-based contracting as a way of diversifying their income streams. By taking more ownership of revenue, providers are incentivized to reduce costs and maintain or improve quality outcomes. This can be in the form of provider-owned I-SNPs (institutional special needs plans) and D-SNPs (dual eligible special needs plans) or through increased risk-based contracts with payers.
– The Medicare Advantage wave is coming. The report finds that Medicare Advantage, which tends to mean lower rates for SNF operators, has reached a national average penetration rate of 34%. Hospital MA discharges to SNFs are slightly lower at 30%, meaning that the rising number of MA enrollees hasn’t yet translated into a big increase in those patients being transferred from hospitals to SNFs. In the Great Lakes region, for example, MA enrollment is above the national average, but its hospital discharges to SNFs are only 19%. This kind of discrepancy is likely because MA is proving more popular among younger seniors who are drawn to its wellness benefits and cost savings. Unfortunately, that doesn’t mean that SNFs can relax and get complacent with their current levels of Medicare funding. As time goes by and those same MA enrollees age, more of them will be discharged from hospitals and land in SNFs. This ties back to the need for SNFs to get creative by improving their clinical capabilities, broadening their mix of patients, and considering adopting risk-based contracts to enhance their profitability.
– The need for a strong Medicare program. SNF operators are on average in a break-even business. The median net profit margin for 2018 was just a quarter of 1%. That largely reflects the fact that low-paying Medicaid patients still account for over 50% of SNFs payer mix. While Medicare had an average net margin of 20%, its patients only account for 15% of SNF utilization. The clear message is that operators need to actively manage their payer mix. It takes a strong Medicare program to help offset losses they incur providing services to long-term Medicaid residents. This again highlights the danger of sticking to the old model of providing rehab and the gains to be made from improving clinical skill sets and winning more referrals from hospitals by showing competence with complex patients.
– Occupancy and length of stay are declining. Despite our aging society, SNF occupancy continues to decline, with the national average falling to 78% in 2018. This partly reflects how more seniors are using home health services to prolong their stay at home before shifting to independent or assisted living. Lengths of stay are also on a downward path, with our current data showing an average of 143 days, whereas stays used to be measured in years. This combination of low occupancy and high turnover puts a premium on operators’ ability to touch more people to keep their buildings full and to stay on top of the growing complexity of their operations. That increases the importance of strengthening aspects of the business like marketing, efficiency in the admissions process, and in billings and collections.