Originally published in McKnight’s

By Betsy Rust

Nursing home operators call it low occupancy. Medicare insiders call it a declining census. Economists call it excess capacity.

Translation: too many empty beds.

And it’s going to hurt many poor and marginally performing skilled nursing facilities.

Already, occupancy has slipped to a five-year low, 82.2 %, in the second quarter of this year, according to the National Investment Center for Seniors Housing & Care.

The leading causes are changes as a result of the Affordable Care Act and the growth of Medicare Advantage, according to the NIC.

Other factors include the growth of nursing home alternatives, such as home care, and rising lifespans. A jump in occupancy that should occur when the baby boomers en masse hit nursing home age, generally in the 80s, is a decade or more away.

For skilled nursing facilities, existence increasingly is becoming Darwinian — the survival of the fittest. And the key determinant will be value proposition.

Operators should ask themselves: What’s my facility’s value to consumers, referral sources and payers?

All three constituencies look to the Centers for Medicare & Medicaid’s Five Star Quality Rating System, and the new de facto floor is three stars. If an operator falls below that level, trouble, and perhaps insolvency, awaits.

And if an operator has three stars overall, they must have something that others don’t, and market it, if they want to escape this economically natural culling of the herd. Perhaps the facility has a component ranking of four or five stars in a particular area. Or maybe it provides care in an underserved a low-income area.

Consumers, in the meantime, will want amenities and concierge-like services. Important amenities include large, well-appointed and private rooms, on demand and high-quality dining, cable TV, Internet access and an unusually caring approach from staff.

Referral sources, on the other hand, want facilities to have strong clinical capabilities to ensure patients aren’t readmitted to the hospital or have poor clinical outcomes.

They also want SNFs that are efficient in managing a patient’s episode of care, length of the stay and ancillary service utilization because hospitals will have financial incentives linked to their post-acute partners.

Efficiency, incidentally, is measured by the MSPB or Medicare spending by beneficiary metric, which evaluates the cost to Medicare for services provided by hospitals and other health care providers.

Note, too, that as more patients transition to home healthcare, the number of patients who require an SNF stay will increase in clinical complexity and acuity.

Thus it’s imperative that SNFs focus on care for higher acuity patients by increasing staffing and training for staff, as well as using clinical extenders.

Eventually, excess capacity will decrease. In five years, the number of nursing home beds may drop by 20 percent. When this happens, referral sources will want access to the better SNFs, which will now be able to command a better price for their services.

Unfortunately, many SNFs are hesitant to raise the bar to three stars and above because of the price tag, particularly for taking care of these higher acuity patients. If they don’t have the money to invest to improve, they are likely to head into a spiral from which they won’t easily recover.

Meanwhile, payers want the same things referral sources do – and then some – because they have the strongest financial incentive.

In short, given all of this, what should an SNF operator do?

• Assess options to improve occupancy. Don’t wait for the baby boomers.
• Know the local healthcare economy. A large amount of SNF utilization will come from home health for short-term post-acute patients.
• Make investments that will appeal to consumers: Install private bathrooms. Put a shower in the bathroom, even if it’s costly.
• Invest in the clinical capabilities of your team. Increasingly, patients will have dementia or multiple ailments that make them clinically complicated and rules out home care. Consider using more four-year RNs and use two-year LPNs and LVNs as an exception rather than a rule.

Betsy Rust, CPA, is a consulting partner with Plante Moran’s senior care and living practice.