To be, or not to be – in the business of healthcare. That’s the question continuing care retirement communities (CCRCs) are facing today – even though my anecdotal experience would suggest the board and c-suite leadership at many of those organizations have yet to be fully reconciled of such reality.
As reported by Alyssa Gerace in Senior Housing News, a recent panel discussion held at SHN’s inaugural Senior Housing Summit in Chicago on July 26th painted a concerning economic forecast for the future of the CCRC model. Having been involved in near 50 CCRC project developments since the early 90s, I have some familiarity with that model – the good, the bad and what is apparently largely misunderstood.
For a segment of the senior population, typically over the age of 75, CCRCs are a very attractive retirement housing option. They offer the comfort and security of a community tailored to meet the physical and emotional needs of seniors, the social energy of a community setting and the critically important peace of mind that personal services, assistance and care are available, when and if needed, removing that potential caregiving burden from their adult children raising families of their own.
The fatal financial challenges faced by several CCRCs have been largely driven by economic realities beyond the control of those communities’ management teams. Yes, there have been a few bankruptcies – isolated cases of weak and exposed capital structures, poor planning, mismanagement and a phenomenon the industry has always been challenged with: service creep. But the economic malaise of the past several years has not been selective in its impact on any business enterprise involving real estate – and so it has not spared CCRCs.
Though understandably self-serving and a tad superfluous in its explanation of the development process, LeadingAge nonetheless prepared a very useful piece that effectively addresses this phenomenon of spotlighting the unfortunate exceptions in, CCRCs Today: The Real Deal About Retirement Communities. I refer Pub Patrons there rather than take up space here for a good rebuttal of media attempts to extrapolate isolated misfortunate into industry condemnation.
What concerns me about the future operational and financial viability of the CCRC model a lot more than market influences and capitalization, however, is the impact of Healthcare Reform. In explaining why this concerns me, it might be helpful first to provide a short summary of how CCRCs contact with residents for post-acute/long-term care.
CCRCs generally contract with individual residents under three agreement types:
Type A: Life care ~ residents typically pay an initial entry fee (often a significant portion of which may be refundable) and a monthly fee that is adjusted for cost-of-living, but if in need of assisted living or nursing care pay no additional fees of any significance.
Type B: Modified ~ the difference from Type A is that some additional payment is required for assisted living or nursing and the amount depends on the nature of the agreement (e.g., there may be a number of free days provided before payment is required or a percent discount from full rate per diems).
Type C: Fee for Service ~ residents requiring additional care pay the full amount for that care, the same as if they had moved in directly to assisted living or nursing without having first been a resident of the CCRC, though priority access to that care may be provided them.
In my experience over the past decade, new project developments have consistently migrated away from Type A contracts to Type C in an effort to avoid the actuarial risk of providing healthcare to an aging population without the contractual means to significantly realign the revenue base generated by that population as a reflection of caregiving costs above what had been projected. This has been a trend bolstered by the relative lack of success of long-term care insurance policies and annual healthcare inflation.
But even CCRCs that contract with residents under a Type C arrangement – and this is especially true for nonprofits (of which LeadingAge estimates comprise over 80% of all properties) – assume a consequential market and brand risk of being expected to provide healthcare to residents that may not be able to afford that care. As noted above, the security of having access to personal assistance and nursing care as and if needed has been a fundamental part of the CCRC’s value proposition.
Healthcare Reform is going to significantly increase and accelerate these risks. So, my counsel with respect to how CCRCs seek to strategically position themselves as healthcare providers is therefore clear: go all in or get out. I believe the prospective economic benefits of going decidedly in either direction is a plausible strategy for long-term financial sustainability. I believe trying to hang out in the middle until the dust settles, short of having a substantial endowment, is a recipe for financial disaster. I have identified below several of the more compelling ramifications of Healthcare Reform to be cognizant of as those leadership teams contemplate this reality.
Intense cost pressures: although the contractual arrangements to provide nursing care at CCRCs most typically include some form of direct payment from the individual receiving care (i.e., whether through an entry fee, monthly fee or per diem fees – or some combination thereof), most communities still have significant exposure to Medicare and Medicaid. As I have written here before, these payment sources will continue to see tremendous pressure to control aggregate spending on national healthcare, regardless of what happens politically this fall and into 2013.
And, as of now anyway, accepting these payment sources exposes organizations to the ACA’s future reporting and transparency mandates, which need to be seriously understood and considered. On the other hand, it is highly unlikely that future quality of care outcomes (which will directly impact revenue) can be met without incurring annual increases in direct caregiving labor costs well above general inflation. All healthcare providers are going to have to struggle with how to reconcile that which cannot be reconciled.
New care delivery models: ACOs, medical home models, insurance exchanges, payment bundling, the potential redesign of Medicare Advantage Plans – as these models are implemented they will have an unquantifiable impact on the healthcare buying behaviors of CCRCs’ targeted market populations. They will also impact historical patient referral patterns. One can only hypothesize at this juncture the ramifications of these impacts – but to remain economically sustainable means aggressively and proactively monitoring and understanding how these care delivery models will affect an organization’s operations and financial viability. It also means actively developing clinically-based relationships with other healthcare providers in those organizations’ markets.
Home and community-based services: Primarily driven by market demands, this appears to be an area where CCRCs have been most proactive (e.g., the CCRC Without Walls concept). But from what I have seen so far, most of the interest and activity has been in socialization, hospitality and personal/home care services. If wanting to stay in the business of healthcare, CCRCs should learn quickly what it means to be part of a community-based integrated care delivery network where revenue is tied to clinical quality performance standards that depend, in part, upon other healthcare providers through contractual relationships. As an aside, I cannot envision a future viable business model for a CCRC that stays in healthcare and does not include home healthcare as a core element of its care continuum.
Infrastructure investments: to be a competitive provider of post-acute/long-term care in lieu of healthcare reform is going to mean having the operational, clinical and technological infrastructure necessary to assess payment risk, monitor and report on outcomes in real time, be effectively positioned to negotiate capitation contracts and be ever vigilant in assessing the emerging local market dynamics of healthcare delivery. This is an expensive proposition that in all likelihood cannot be funded out of operations: meaning the necessary investment will require either use of equity, incurring debt or leveraging the infrastructure of other healthcare providers in the market through contractual relationships.
Tax exempt status: Though Section 9007 of the Affordable Care Act requires that only hospitals having tax-exempt status complete a Community Health Needs Assessment, how long will it be before a similar requirement is mandated for nonprofit CCRCs – especially when consideration is given to the average wealth and incomes of the populations served by many of these communities across the country. Being licensed as a nursing care provider with tax-exempt status will ultimately require addressing the justification of that status in terms of how the CCRC benefits its surrounding community.
These are a few of the important considerations that come to mind when contemplating whether TO BE or NOT TO BE in the healthcare business. I know there are quite a few CCRC organizations that have already recognized this reality and are proactively planning to stay in healthcare. I have had the very good fortune to have worked with a number of them. One thing I found they have in common: they each have assumed a decidedly outward looking vantage with respect to their future strategic positioning.
For better or worse, they have embraced the reality that being (staying) in healthcare very much means being proactively integrated into the surrounding community and healthcare provider network. The resultant consequences of that reality may not create an attractive positioning for some CCRC organizations – and the resident populations they serve. This is completely understandable and in many cases ought to be thoughtfully anticipated. Those organizations may be much better served by moving toward an active adult model. But they should get out of the healthcare business now, before it’s too late.