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Overall clinical outcomes may be on the upswing in nursing homes, but most operators have a major new business problem to prepare for, the leader of the country’s largest provider association says.

Interest rates, which are expected to rise as many as six more times in 2022, will present many nursing home leaders with challenges they have never before seen, American Health Care Association President and CEO Mark Parkinson told McKnight’s Long-Term Care News in an interview Tuesday.

“An underreported worry is the interest rate risk that many providers have. Most providers have never operated in an environment where interest rates were stable or going up,” Parkinson explained. “For the last 30 years, interest rates were going down so people were used to that.”

Two weeks ago, the Federal Reserve voted to raise interest rates 0.25%, the first increase since 2018. Rates are still historically low, but experts predict the Fed will nudge rates up at each of its remaining six meetings this year, ending at nearly 1.9%. 

Interest rates are expected to rise almost another point next year before settling back to around 2.35%, predicted construction industry economist Ken Simonson, a keynote speaker at last week’s NIC spring meeting.

“When interest rates are going up, it’s an enormous business problem for long-term care,” Parkinson told McKnight’s. “Many providers are on loans with banks that mature every five years. So the terms of those loans change every five years, and when interest rates go up, it’s just more money you have to pay every month on the mortgage. A 2% rise in interest rates is a very material event for a provider.”

Rising interest rates is a topic that hasn’t been discussed because “it hasn’t been relevant until recently,” he noted.

Parkinson added that, during his 12 years at the helm of AHCA, he has encouraged providers to lock in their debt with HUD, which has permanent, 35-year financing.

“Their rates never change,” he noted. “I think a lot of people have done that, but not everyone.”

Another invisible thief

Another “i” word also looms with bad news for providers.

“Inflation is a double-edged sword,” Parkinson offered. “The negative with inflation is Medicare and Medicaid rates lag the inflation that is out there.”

Medicare market basket increases and state Medicaid levels eventually respond — but there’s “at least” a one- or two-year time lag, Parkinson noted soberly.

The pandemic has been particularly harmful in this regard, he said, since the 2022 market basket considered 2018 figures.

“So the dramatic increase we’ve seen in labor in nursing homes (during the pandemic) isn’t really reflected. There’s a huge time lag,” he cautioned.

While it’s a business problem, there are some winners when inflation hits, he added.

“Real estate values go up quite a bit during inflationary periods. The balance sheet of providers who actually own their real estate will see a pretty big jump,” he acknowledged. “It’s all on paper, of course, but it is still a significant benefit. But net inflation is very bad for the sector.”

Solving the field’s short-staffing problems via more open immigration policies would help, he said.

Better than a mandate

Mandating a staffing minimum, as the Biden administration has said it will do after a year-long study, is not the best answer, Parkinson said. Provider associations studied the issue in-depth while helping develop the Care for our Seniors Act last year and estimated a sky-high price tag.

“In order to do a minimum staffing proposal that would be meaningful and actually increase the number of workers, it would cost the federal government about $150 billion over a 10-year period,” he said. “It’s a huge price tag. It would be good for it to be done — if it was paid for. 

“But what we then looked at was the opportunity cost. If instead you allocated resources to an infection control preventionist or to an RN, what would that cost and what would the benefit be?” 

That plan would be much less expensive and also more effective than a straight minimum staffing mandate, clinical leaders told AHCA and others.

“Good policymaking is all about using your resources wisely and getting the most benefit you can with the limited resources you have,” Parkinson said. “In our view, that would be infection control and an RN, and not some blanket minimum staffing proposal.”

He noted that the idea gained traction during negotiations for the Build Back Better bill, which was dropped last year. Senate Finance Chairman Ron Wyden (D-OR) in particular “embraced” the idea.

“The bill had a requirement for additional RN coverage that was paid for,” Parkinson recalled.”It made it pretty far, but not completely across the finish line. But far enough that I think there’s hope it could happen down the road.”