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 Providers Ponder: To Build Or Not To Build


Many of the nation’s skilled nursing facilities (SNFs) are due for a makeover, yet providers must grapple with whether to tear down and start anew or refurbish an existing building.

The heyday of SNF construction occurred in the ’60s and ’70s. Besides aesthetics—many residents do not want to be housed in cramped rooms and share bathrooms—these units face the possibility of coding violations. Yet the issue is not so black and white. Shades of grey exist in terms of business models, new reimbursement programs, and demographics.

“The answer is kind of complex,” says Fred Benjamin, chief operating officer of Medicalodges. “It depends on the surroundings and the marketplace.”

Nursing center financing is extremely tight, with margins typically ranging from 3 to 5 percent, so little room is available for building projects. Medicaid typically covers 60 percent to 75 percent of the SNF market, says Benjamin. To cover costs, nursing centers have increasingly diversified or expanded to higher-paying lines of business (home health, assisted living, post-acute care, insurance) to cross-subsidize services with lower reimbursement levels, such as Medicaid.

Compounding the problem is that numerous states are facing budgetary shortfalls. Kansas and Oklahoma are encountering a $600 to $1 billion budget deficit, while Illinois is bankrupt, turning all these states into “political powder kegs” in terms of getting Medicaid reimbursement, says Benjamin.

Medicare payment programs, such as accountable care organizations and bundled care, are also eating away at SNF providers’ profits—and their chances to increase their buildings’ curb appeal.

“In this environment of payment reform, what we’ve had to do is remodel our buildings because it’s so expensive to build anymore,” says Tom Coble, chief executive officer of Elmbrook Management Co. and 2015-2016 chair of the American Health Care Association (AHCA) Board of Governors. “There’s a lot of new products and technologies available where you can make older buildings look really nice.”

The faces of residents, and their needs, also factor into the construction conundrum.

“The younger cohort [have fewer disabilities] but have more chronic conditions—Medicare does not pay as much for chronic conditions,” says Mike Cheek, senior vice president of finance policy and legal affairs. “Also, the length of stay is cut in half. Hip replacements go home in two days and do physical therapy in their homes instead.”

Another contentious issue is that of certificates of need (CONs), legal documents required in 35 states before any facility expansion is allowed. CON supporters say these papers prevent overbuilding and thus price inflation (facilities that cannot fill their beds must meet their fixed costs through higher charges for the beds that are being used). CON opponents say these documents reduce competition between facilities and may actually keep prices high.

For the time being, more providers are opting to do renovations. Several states, such as California, have programs that finance refurbishment/modernization of buildings all in the name of “culture change.” Cheek advises providers to look to see if their state has a similar program.

Meanwhile, most providers are making the decision to build or not to build one facility at a time.

“It’s difficult to decide what to do,” says Chuck Brown, culture and development officer at PruittHealth. “We try to figure out what’s best for the community and what’s best for the patient.”

Jackie Oberst is Provider’s managing editor. Email her at joberst@providermagazine.com, or follow the magazine on Twitter @ProviderMag or @ProviderMyers.​

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