McKnight’s Guest Column: Bundled Payments

McKnight’s is a leading skilled nursing industry news source that I’ve written for in the past.  This is my first guest column since moving to the REIT side of the business.  We meet with investors and analysts a lot and one of their most pressing questions lately is around bundled payments/comprehensive care for joint replacements (CJR) so I wrote about my take on it for McKnight’s.  Click on the article below to read the full text.

Dave Sedgwick McKnight's CJR Skilled Nursing article

 

Or read it below …

“What’s your take on bundled payments?”

About a year ago, investors and analysts would occasionally ask us some form of that question. Now, virtually every time we talk with investors, analysts, and bankers, they ask. At the end of answering questions on the topic for 45 minutes during one of these recent meetings, the investor laughed and incredulously said, “So, basically you’re the only ones saying, ‘No big deal. Nothing to see here. Business as usual.” Well, yes. And, no.

There’s a lot of hand-wringing in the post-acute world these days as observers try to predict just how material the constant changes to reimbursement will be for the operators. It seems generally believed that bundled payments expansion is a net-negative for the industry since it partly exists to lower Medicare payments. There will be “losers” who don’t adapt to the changes. But, there will also be “winners.” There always have been. As a former operator and current investor in the space, I have a positive view on what these changes mean for the profession.

Context Is Key

Viva-La-Evolution

I entered the skilled nursing profession as an administrator-in-training at The Ensign Group in California in 2001. Back then, one of the first themes I picked up on from the seasoned ED/DNS/DORs around me was that, “this isn’t your grandmother’s nursing home anymore.” “No, you see, while we still provide long-term custodial (I will always hate that term) care, we now specialize in providing short-term rehabilitation for Medicare and HMO patients.”

For the last 15 years, the best operators have been adapting to the demands of the hospitals (higher acuity, readmission rates), CMS (MDS/RUGS changes, 5 star ratings, compliance), and HMOs (shorter length of stay, case management, collaboration).

“So are you worried about this Joint Replacement thing?

On April 1, 2016, the Comprehensive Care for Joint Replacement (CJR) went into effect in 67 markets. Briefly, the CJR holds the participating hospitals financially responsible for the episode of care from the day of admission until 90 days later for major joint replacement or reattachment of lower extremity joint replacements (LEJR), hips and knees. If a hospital can lower the cost of that 90 day episode of care below targets set by CMS, they will reap the financial rewards with a bonus. The opposite is also true. Some warn that allowing hospitals to waive the required three night hospitalization before discharging CJR patients to SNFs rated 3 star or better will crush the 1-2 rated facilities. Others warn that hospitals will be incentivized to send CJR patients directly home with Home Health, bypassing SNFs altogether, because of the cost savings. In my opinion, these predictions have been overblown. The sky is not falling.

Now sing it with me … “You Tell Me That’s It’s Evolution”

evolution-darth-vader

I understand why outside observers worry that this as a seismic shift for skilled nursing (and HH for that matter). How, then is CJR not the end of the world for post-acute facility providers? Again, I see CJR as a positive step for post-acute care because it advances trends that level the playing field for stronger operators, ultimately benefiting the patients. Here’s what I mean.

  • Length of stay: HMOs have been pressuring SNFs to shorten length of stay for many years. The last facility I personally ran was 100% short-term rehab. Our combined Medicare/HMO average length of stay was in the mid-teens. Strong providers have been equipping themselves to shorten length of stay for years. They will employ similar practices on these LEJR Medicare patients that they have been using on HMO patients, thus gaining CJR market share from those who don’t.
  • Case Management/Data Reporting: Try competing in a market where your competitors employ the hospital Discharge Planners as part-time Social Workers on the weekend or pay kickbacks for referrals. What? It happens. Today. I’ve competed against it. The only way we could “level the playing field” was to be BETTER. We had to build strong, data-driven (readmission rates, satisfaction scores, survey results, clinical outcomes) relationships with the hospitals that earned our admissions. We had to reach out to hospitals years before ACOs or BPCI to “show them the data!” How does CJR impact this? It should put a vice on the unethically influenced placement of patients and make the market for post-acute patients more merit based. For the many hospitals that didn’t care about their post-acute discharge system, now they will. Stronger operators are poised to gain CJR market share because of it.
  • CMS Star Rating: As soon as the star ratings came out years ago, we complained because the system doesn’t necessarily reflect quality care. In the short-run, hospital may use star ratings in their discharge calculus. But, they’ll evolve as well. SNFs who are 1 or 2 stars can still receive joint-replacmenet patients. And, here’s the thing, patients who are ready to be DC’d from the hospital after a night or two have already been heading home with HH for years. Patients that have to go to the SNF have an initial hospital stay past 3 days anyway.
  • Readmission Rates: At the end of the day, the cost of caring for that patient for 90 days depends greatly on whether or not the patient is readmitted to the hospital. Hospitals are going to be very sensitive to which post-acute location gives them better odds of not having a re-hospitilization. Where would you send them? To the strong SNF provider with 24-hour RN coverage, a medical director, in-house therapists, wound care professionals, etc. or the patient’s home with her elderly husband to care for her in between the hour or so/day she gets from HH. Both graphics below from Avalere, show hospitals the need to partner with SNFs with the lowest readmission rates. It’s no wonder CMS is adding readmission rates to the star rating system this summer.

Screen Shot 2016-03-27 at 3.09.39 PM Screen Shot 2016-03-31 at 3.49.54 PMWhile there may be a slight tightening on the flow of LEJR patients for the general industry (only for 67 markets for now), the strong providers will be able to capture greater share of that theoretical smaller piece. But, let’s not forget the rest of the pie! Sometimes it seems that outside observers focus so much on the joint-replacement piece of the patient pie that they forget a few key points:

  • SNFs are taking care of sicker and sicker patients every year (the kind that absolutely require 24-hour nursing care)
  • Seniors demographics haven’t changed. The numbers of SNF-age patients is growing and will continue to grow for many years to come. While a piece of the pie might shrink, the overall pie will be expanding for years to come.
  • As a general rule, the highest Medicare reimbursement occurs at the start of the SNF stay, sometimes “stepping down” towards the end. So, as providers shorten length of stay, they may see a slight increase to their average medicare reimbursement rate.

So, What?

So, what does this all mean for investing in skilled nursing real estate? It has always been true that in healthcare real estate, the operator matters most. The playing field has been changing for the last 15 years. BPCI/CJR actually has the potential of slightly leveling the playing field in behalf of stronger operators. BPCI/CJR can’t be ignored and should be a factor in underwriting acquisitions. Higher lease coverages and cap rates are in order for facilities with lower star ratings and higher readmission rates as those metrics become more and more impactful on a provider’s ability to shift patient mix and capture short-term rehab market share.

Today (and tomorrow), more than ever before, your SNF real estate investment will hinge on the quality, sophistication, and culture of the operator running it.

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McKnight’s Guest Column: Show Me The Money!

Happy Thanksgiving!  I just realized that another guest column was posted to McKnight’s.  This topic of whether or not staff should EXPECT a raise with their review came up when a friend of mine, Josh (new administrator) asked my opinion about it.  His question reminded me of when a CNA taught me a valuable lesson years ago at my first facility … You can read the entire article by clicking HERE or on the article image below.

Guest Column for McKnight's regarding annual reviews and raises
Guest Column for McKnight’s regarding annual reviews and raises

McKnight’s Guest Column

Guest Column @ McKnight’s

McKnight’s is a long-term care industry magazine that I’ve read for years.  Several months ago, I read on their site the words of an administrator who expressed a wish for more empowerment at the facility level.  I contacted the Editor of McKnight’s to see if I could contribute an article about my company since our business model is exactly what that administrator was looking for (empowered, decentralized, entrepreneurial).  Instead of talking about my company, The Ensign Group, he invited me to talk about the principles behind the different corporate structures.

Thank you to McKnight’s Jim Berklan for the opportunity.  I’ve received a lot of positive feedback from the piece.  Here it is …

What the long-term care world needs now

Dave Sedgwick
April 27 2010

The Centers for Medicare & Medicaid Services’ shift to a prospective payment system in 1998 sent shock waves through the industry and claimed the financial lives of many prominent long-term care companies.

The current combination of recession, Medicare cuts, RUGS IV, MDS 3.0, state budget crises, QIS, RAC, and the unknowable final shape of healthcare reform have today’s leaders feeling déjà vu.

What do long-term care companies need in order to avoid last decade’s casualties? Here are a few very important things:

Culture

An organization’s culture—its structure and values—is the single most important factor for overcoming acute challenges and for transforming the industry one facility at a time.

Centralization vs. decentralization

Speaking generally, there are two types of corporate structures: centralized and decentralized.  The most prevalent structure in long-term care is the centralized model. To be blunt, the primary need for a controlling, top-down, large corporate bureaucracy is to make up for incompetence at the facility level.

If this is not so, then why pay for all of those corporate puppeteers?

Imagine that your best regional and corporate nurse consultant led each and every facility in your company. Would you need the same amount of corporate overhead (divisionals, regionals, consultants, VPs, executive VPs, senior executive supreme VPs, etc.)?

Don’t get me wrong. I’m not saying that having better leaders at the facility means no support is needed. I’m also not saying there aren’t great administrators in traditional corporate settings. But I am saying that if you hope to attract a different breed of administrator and director of nursing, you have to cut the puppet strings—empowering the facility leaders to lead.

A decentralized model attracts the type of leader who is entrepreneurial and innovative, and has an ownership mentality. When the puppet strings are cut, facility leaders no longer say, “I have to check with corporate.” They own their problems and solutions. When major tests to a market or an industry happen, a decentralized organization has many creative partners attacking the problem in the trenches instead of a small handful of “know-it-alls” at corporate.

A decentralized model also attracts the type of support people who believe in the creativity and responsibility of local leaders and love to help them grow.

One of the main arguments against decentralization is that it is too risky—clinically and financially. The centralized mantra is “Thou shalt do things our way” in order to ensure “things” are done right. To avoid risk, decisions are made at the corporate level: vendor contracts, hiring, firing, compensation, policies, forms, etc.

The trade-off for operating that way, of course, is that you get a culture that attracts “employees” instead of “owners” and you promote the “all-stars” out of the facilities where our staff and residents need them most.

In order to mitigate the inherent risk of decentralization, a company must have deep-rooted shared values among its facility leaders.

Values

Without a fanatical commitment to core values, a decentralized structure is too risky. But if a decentralized company hires, trains, and measures based on shared values, it has the potential to outperform its centralized competitors because it has infused top talent throughout the company and where it’s needed most.

Almost every company has a written culture statement (mission, values, motto, etc.) But, the difference between those that will be able to overcome major tests and those that won’t will be how real those values are to the facility leaders themselves. Too often, mission-type statements collect dust as decorations.

The structure will shape the true values and feel of a company more than anything. When shocks to the industry hit, our companies’ culture (structure & values) will be tested.

The testing of Johnson & Johnson

One of the prime examples of a decentralized company’s culture leading it through crisis is Johnson & Johnson. In their 1981 annual report, they state:

“Johnson & Johnson is not one company but many  . . . The largest has 6,300 employees; the smallest, at year-end had six. . . .

“Whatever their size or location, they share a commitment to meeting the special needs of a well-defined customer. In doing so, they create a wide variety of innovative ways to successfully run their businesses.

“We feel that the secret to liberating that productivity is decentralization— granting each company sufficient autonomy to conduct its business without unnecessary constraints.  In short, we believe decentralization = creativity = productivity.”1

Do we see companies in long-term care that are structured that way?  Rarely. But, therein lies the key to both attracting and retaining a different breed of facility leader.

These statements by J&J were soon put to an extraordinary test.

In 1982, cyanide-laced Tylenol pills killed seven people in a few days in the Chicago area. J&J’s reaction was extraordinary. In spite of requests from officials to not recall the product, J&J called for a nationwide recall of 31 million bottles with a retail value of $100 million. Their market share went from 35% to 8%. One month later, they reintroduced capsules in a new, triple-sealed package, and within several years, Tylenol had reclaimed its top spot in the market.

Speaking in 1983 about that major crisis, James Burke, J&J CEO from 1976 to 1989, said the following:

“I do not think we could have done what we did with Tylenol if we hadn’t all gone through the process of challenging ourselves and committing ourselves to the [culture]. We had dozens of people making hundreds of decisions and all on the fly. And they had to make them as wisely as they knew how.

“And the reason they made them as well as they did is they knew what the set of beliefs that the institution they worked for were.  So they made them based on that set of beliefs and we made very, very few mistakes…. “2

Creating new cultures

What lessons can we learn from recent long-term care history and companies like J&J? In order to be prepared for the significant tests ahead, we need to have efficient, nimble, talented organizations fanatically committed to its core values.

Companies with centralized, top-down, bloated bureaucracies needing to justify their position and authority are slower to react to the shockwaves that will come.

Not only will a decentralized organization of many owners and partners come up with better ideas than a centralized few, but it also will be able to act quickly, like J&J.

Empowering the field and eliminating bloated bureaucracy is for many an impossible pill to swallow. Yet, if you were to ask the dozens of beaten companies from the late 1990s if they would try that medicine if given the chance, I bet they would.

1 Harvard Business School, Case Study: Johnson & Johnson (A): Philosophy & Culture, pg. 3

2 Video, Philosophy & Culture, A Question & Answer Session With Advanced Management Program Participants at Harvard University, December 1983

Dave Sedgwick is vice president of organizational development for The Ensign Group. His healthcare leadership blog can be found at https://worldclasscare.wordpress.com.