Gone Missing: New Nursing Homes

While the existing stock of skilled nursing facilities is mostly outdated, only a handful of investors and providers are putting up new buildings.

By Jane Adler

While the construction of new assisted living, memory care and to a lesser extent independent living projects has been on a tear over the last several years, another part of the seniors housing industry has lagged far behind. Groundbreakings are only occasional events for new skilled nursing projects even as the number of facilities declines and many of the remaining ones are functionally obsolete.

The obvious question is why?

The skilled nursing sector faces multiple challenges, ranging from falling occupancies to a changing healthcare system, a lack of workers, and fierce competition from home care and assisted living.

But some providers are bucking trends and building new projects. These providers figure new facilities will be better able to meet the needs of changing consumer preferences and a quickly evolving healthcare market.

“We knew we needed improvements to our old 1967 building,” says Rick Smith, chief operating officer of Orlando Health – Health Central Hospital. Based in Ocoee, Florida, Orlando Health operates seven hospitals and other healthcare facilities.

The nonprofit provider has a new nursing facility underway that is scheduled to open this February. The building will feature short-term rehab units, along with memory care and hospice suites. The old nursing home will remain open to house long-term care residents. “We can offer a continuum of care,” says Smith of the business strategy. “That’s an advantage.”

The skilled nursing sector is trying to break out of a protracted slump. The average occupancy rate at skilled nursing facilities across the country hit a record low of 81.7 percent in the second quarter of 2018 based on data from 1,449 properties in 47 states, according to the National Investment Center for Seniors Housing & Care (NIC). In fact, the 81.7 percent occupancy rate was the lowest level since NIC began tracking this data in 2011, when it stood at nearly 87 percent. While the occupancy rate inched upward by 14 basis points to 82.2 percent in the third quarter, it remained nearly a full percentage point below year-earlier levels.

The number of freestanding nursing homes has declined, according to NIC. There were 5,806 properties in 2008 compared with 5,753 properties in 2018. Estimates from other sources say several hundred nursing homes close every year.

In December, Senior Care Centers, a Dallas-based operator of more than 100 seniors housing communities in Texas and Louisiana, filed for Chapter 11 bankruptcy protection. The company is the largest skilled nursing provider in Texas, but has struggled to pay its rent.

Weak demand for skilled nursing units stems from changes in payment systems, healthcare policies and competition. Reimbursements to nursing homes are being squeezed as managed Medicare (Medicare Advantage plans from private insurers) becomes more common. For example, reimbursement rates for managed Medicare patients have dropped from $488 a day in 2011 to $427 as of September 2018, according to NIC.

Hospitals now send more people directly home rather than to a nursing facility for a short-term rehab stay. And hospital patients who are sent to a nursing facility to fully recuperate are unlikely to stay for the 30 days that had previously been typical. Length of stay has been shortened under new Medicare guidelines.

Another factor impacting the sector is the long-term care resident who often depends on Medicaid reimbursement. Medicaid reimbursement rates average $208 a day. Providers struggle with how to balance their census between these long-term stay residents and the more profitable short-term stay patients whose care is reimbursed by Medicare.

Big changes are on the horizon. Starting Oct. 1, 2019, the Centers for Medicare & Medicaid Services (CMS) will implement a new reimbursement system, the Patient Driven Payment Model, which is based on patient
progress. Skilled nursing facilities are scrambling to adjust their treatment protocols in order to protect their revenue.

Owners retool strategies

New construction of skilled facilities falls into three categories: the replacement of an old building that does not change the total inventory of the market; a totally new facility that adds new units to the market; and an addition to an older property.

Most of the activity consists of replacement buildings, or additions. Few markets have enough demand to support new nursing homes, according to sources. Also, many states restrict how many new nursing home units can be built through certificate of need (CON) and bed moratorium laws.

Providers and investors must either upgrade or replace old buildings or face further declines in occupancy as consumers and referral sources gravitate toward more modern facilities. At the same time, clinical offerings must be upgraded and tweaked to provide services for frailer and sicker residents.

The nursing homes that are being built today are far different from the older versions. New buildings have a residential look, more like a hotel than a hospital. Private rooms are standard, and amenities include features now commonly found in other senior living properties such as coffee bistros and inviting common areas with fireplaces and comfortable seating.

“It’s like night and day,” says Kim Grasso, administrator with Whittier Healthcare Network, referring to the new nursing home the company opened last year in Newburyport, Massachusetts. “It’s like walking into a five-star hotel.” Whittier is a for-profit provider that operates eight nursing homes.

The strategies that drive new projects differ based on corporate goals and market realities. Genesis HealthCare (NYSE: GEN) recently opened a new skilled facility in Exton, Pennsylvania, near Philadelphia. Genesis operates 410 skilled and post-acute care facilities across the country, most of which are leased by Genesis.

Based in Kennett Square, Pennsylvania, Genesis warned in November that it may have to file for bankruptcy protection without relief from creditors, citing the pressures of healthcare reform and escalating lease costs.

The company had already been repositioning its portfolio and is in the process of divesting or exiting 63 facilities. The goal going forward is to focus on core markets such as the Northeast and Mid-Atlantic states.

The new Exton facility is a
PowerBack Rehabilitation center, the Genesis brand name for its product designed for short-term stay patients. Genesis operates 10 PowerBack centers. The facilities are positioned to provide intensive post-acute rehabilitative care with a short length of stay and lower episode cost, according to Paul Bach, executive vice president and COO at Genesis.

The PowerBack centers also aim to reduce hospital readmissions, a metric carefully monitored by hospital administrators since readmissions can trigger financial penalties for the hospital. “The value we provide is becoming more apparent to health plans and systems,” says Bach.

The clinical program is wrapped in an amenity-rich service offering, says Bach. Private rooms are standard along with high-end meal service. A guest services program fulfills patient requests, such as visits from a favorite pet.

PowerBack buildings are typically designed with the rehab area, bistro and dining venue on the first floor near the entrance. It creates an upbeat activity hub, while patient rooms offer a quiet environment to encourage rest.

The care provided by the
PowerBack centers fills a niche previously unavailable in the market — fitting somewhere between a hospital and a long-term acute care hospital, says Bach. He adds that if a facility such as a
PowerBack center were introduced 10 years ago, it would have focused on orthopedic procedures such as knee replacements. Since those patients are now often treated on an outpatient basis, today’s PowerBack centers are geared toward the management of complex medical conditions.

Most PowerBack centers offer cardiac care management, stroke recovery and pulmonary care programs. Also, patients transitioning out of PowerBack centers who need continuing therapy can receive the treatments at home.

Despite the company’s troubles, Bach says the new PowerBack center that opened in August is doing very well on all accounts.

“We continue to be very bullish on the model and we are learning to adapt our model as conditions change — reimbursements, length of stay, transition to Medicare Advantage, et cetera.  So we aren’t necessarily rethinking our strategy as much as we are being proactive in revising our model based more on external factors,” he says.

“As our company and our sector continues to successfully emerge from this economic downturn, we view this model of care being as relevant as ever when you consider the ongoing shift toward value-based care.”

He adds that a big issue for Genesis, as for other nursing home operators, is finding enough labor to properly staff the buildings. “It’s a real challenge,” says Bach.

Financing is available

Capital to finance new nursing homes is available, although less so than for other types of senior living projects, according to Lee Delaveris, vice president at KeyBank Real Estate Capital, who operates out of the company’s office in Columbus, Ohio.

Nursing homes are viewed as a risky business because of all the operating challenges, he says. “Capital is available for the right borrower,” adding that KeyBank generally works with experienced owner/operators.

Since nursing home owners/operators often hold the asset for the long term, an option is the HUD/FHA Section 232 mortgage insurance program, says Delaveris. It offers construction financing as well as a 40-year, fixed-rate loan.

Financing is available for new ground-up projects and additions. KeyBank also offers bridge-to-HUD financing for existing properties. “The terms and loan structure are attractive, especially in a rising interest rate environment,” says Delaveris.

KeyBank was HUD’s largest healthcare lender during fiscal year 2018 with $812.7 million in total loan production. (The loans cover other types of care facilities, not just strictly nursing homes.)

Most of KeyBank’s nursing home loans are the refinancing of existing projects to fund capital improvements. “There’s a lot of obsolete real estate,” says Delaveris.

Many new nursing homes are replacements of old buildings. New replacement buildings are designed to serve specific types of residents. Since many short-term patients need physical and occupational therapy after joint replacement surgery, new buildings feature large, well-equipped rehab gyms and facilities. Therapy sessions are no longer conducted in hallways or small empty rooms.

Also, the new buildings include clinical services to treat medically complex patients with special conditions, such as congestive heart failure, renal disease and strokes.

Over the last 10 years, the Ciena Group has built 12 new nursing homes in Michigan. Some replaced existing, older facilities. Others were completely new facilities to the market, which in Michigan requires a CON.

Based in Southfield, Michigan, the Ciena Group has three replacement projects currently underway in the state. The company owns and operates projects in Michigan, Ohio, Virginia, North Carolina and Indiana.

The Regency at St. Clair Shores, located approximately 18 miles northeast of downtown Detroit, is scheduled to open in mid-
February. The $22 million project will include 150 beds. It replaces a 100-bed building nearby.

Another new building will replace an old building in Westland, Michigan, about 20 miles west of Detroit. “The third project is the most exciting,” says Mohammad Qazi, CEO at Ciena. The new nursing home will replace two smaller buildings in the city of Detroit. Qazi bought his first nursing home in Detroit and points out that a new one has not opened there in many decades. “It’s been on my wish list,” he says.

The Detroit and Westland buildings are expected to open in the next 12 months.

The new buildings have more common areas than the old ones, more amenities and services such as fine dining and spa treatments. “Where will a family want to place a loved one?” asks Qazi. “In a brand new building with high-end services or in a 40-year-old building with shared rooms?”

Qazi has received approval from the state to build three more new nursing homes in Michigan, but has temporarily put the plans on hold.

He hopes to build the projects but is being cautious, citing the rising cost of construction and the tight labor market, the latter of which makes it difficult to staff buildings.

Reduced reimbursements from Medicare, managed healthcare, and shortened length of stay for rehab patients are other factors that impact his decision. “The business is challenging operationally,” says Qazi.

Balancing type of care

New facilities often segregate long-term care residents from those who are only there for a short stay.

Most of Ciena’s buildings offer short- and long-term care. The short-term care population is generally made up of seniors in their 70s, whereas the residents in long-term care tend to be much older, according to Qazi. It’s hard to separate the two populations in the older buildings, says Qazi. The new buildings have separate dining venues and different activities for each group.

Orlando Health’s old 228-bed facility is being partially replaced by a new 95,000-square-foot skilled nursing structure. The old building will be used only for people who need long-term care.

The new building is situated on Orlando Health’s central hospital campus, about seven miles from the old nursing facility. The new building will include 60 beds for short-term stay patients, 40 beds for memory care residents, and 10 hospice beds. The building will also feature outpatient rehab areas, private rooms, new dining options and a sandwich bistro. The secured memory care unit will have its own outdoor space, common areas and dining venues.

The location of the new building on the hospital campus offers an advantage, says COO Smith. The medical staff is at the hospital, a short walk across the campus if they need to visit patients.

Whittier Healthcare Network’s new facility in Newburyport, Massachusetts, includes 123 units, about double the size of the old 60-unit building it replaced. The new building, Port Healthcare Center, features the rehabilitation unit for short-term stay residents on the first floor. Long-term residents are housed in two sections on the second floor.

The new building is about 90 percent occupied.

Looking ahead, operators and investors expect their new buildings to become the treatment place of choice because referral sources are more likely to send patients to new nursing homes that offer the best services.

Demand for skilled nursing services will increase as the population ages, predicts Bach at Genesis. “We feel like the sector is beginning to see the light at the end of the tunnel.”