An Obamacare alert for health lenders

Part 1 of a two-part series. Part 2, "Can your healthcare borrowers cope with Obamacare?," can be found here.

During a recent gathering of long-term care owners, operators, and lenders, one commentator noted that "We are looking at chaos in the healthcare industry." Another stated that 1,000 of the nation's 5,000 hospitals will go out of business in the next eight years.

The premise underlying these statements: Whenever there is an inflection point within any industry, there are winners and many companies that get left behind.

And the U.S. healthcare system stands in the middle of such a point with the continuing implementation of the Affordable Care Act (ACA).  Recent conflicting appeals court decisions that will inevitably require sorting out by the U.S. Supreme Court only add to the confusion and uncertainty.

Assessing the lay of the land

Key ACA provisions have been dramatically changing the marketplace. There is more uncertainty and evolving risk models. Many note that the implementations of Accountable Care Organizations (ACOs) and Bundled Care Payment for Care Improvement (BCPI) initiatives are game changers for providers.

ACOs are groups of doctors, hospitals, and other healthcare providers such as post-acute facilities structured to provide a solution to control health spending and improve patient outcomes. BPCI is an innovative new payment model that includes financial and performance accountability for episodic care.

For many healthcare borrowers, this is an opportunity to solidify positioning within the community. However, there remain significant headwinds facing operators attempting to transform into the new dynamic. Some will thrive. However, there will be an increasing default environment for many lenders in the healthcare space.

Past cycles of financial distress in the healthcare industry provide guidance to lenders on how proactive monitoring and reaction can help protect the bank's long-term investment.

Lenders must be astute and proactive in asking the right questions to identify potential default situations early. Early detection of financial distress in healthcare lending provides the financial institution a broader spectrum of restructuring and other positive outcomes to maintain a performing credit.

This article analyzes some key questions lenders should be asking their long-term care borrowers in today's healthcare environment.

Questions to ask your healthcare borrowers

Here are the first three questions we suggest putting to these clients. Part 2 of this article will review six more questions to ask:

Q1. What steps have you taken to join an ACO network or BPCI initiative?

In today's healthcare environment, policymakers and health care providers recognize the need to coordinate care between acute care hospitals and post-acute providers.

The continuum of care of the future includes a patient-centered care model built on cost and value. On one end of the spectrum is the acute care hospital providing physician coverage, case managers, information sharing, and IT connectivity to coordinate care.

Upon discharge from a hospital, patients face a continuum of care including, transitional care hospitals, in-patient rehabilitation hospitals, skilled nursing/rehab centers, outpatient rehabilitation, homecare, hospice care, palliative care, adult day care, and assisted living.

The ultimate goal is for the patient to receive care in place at home.

To be relevant under this new system, providers must take steps to make sure they are both receiving referrals from providers who they can complement along the continuum, and that the quality and value of care they provide maintains and solidifies their referral relationships.

As ACA implementation continues ramping up, providers in every sector of the healthcare industry are scrambling to assess the value of buying into this new, coordinated care model.

Hospitals, health systems, and physician groups have been vocal in their opinions of the pros and cons associated with partnering and shared savings. The long-term care industry, however, has been a bit more subdued. The post-acute model of the future includes the provision of transitional care for the terminally ill, short-term rehabilitation and sub acute care, and chronic care for the physically frail, cognitively impaired, and physically impaired.

Industry leaders see an anticipated growth in the short-stay transitional care population and shrinking opportunities in the long-stay chronic care population. One industry report shows that the average length of stay at skilled nursing facilities in 2011 was 28+ days and is projected to drop to 10 days by the end of 2014.

Thus, the growth strategy for long-term care borrowers must include expansion of operations to full coverage in the healthcare continuum.

In the new healthcare model, doctors will be paid for how well they take care of patients, looking both at quality and cost.

Physicians will move patients from expensive hospital stays to less expensive settings. By way of example, a hospital stay today averages $1,500/day, while a stay at an assisted living facility (ALF) averages $108/day. Hospital stays are, and will continue to be shorter and therefore, post-acute providers have an opportunity to join partnerships to lower costs in the healthcare continuum. Well-positioned post-acute providers with high quality operations can take advantage of this shift in focus to increase utilization.

Given the ACA's new bundling of care provisions, potential for bonus payments to ACO's under the CMS' regulations, and readmission penalties hospitals incur when the patient has to return to the hospital, post-acute providers who can document sustained quality of patient care stand to benefit.

The converse is also true that post-acute providers who provide mediocre or bad care will suffer, as hospitals will avoid discharging patients there. Under one of two tracks through which an ACO can elect to receive payments under the CMS regulations, an ACO may face a penalty for failing to meet cost savings goals. Alternatively, they may receive a reduced distribution under the shared savings program for failure to meet certain quality standards.

As a result, ACOs will be looking for providers who will maximize their ability to receive cost-sharing bonuses and reduce the potential for penalties.

Borrowers need to begin thinking about their ACO or BPCI alliances sooner rather than later.

As of Feb. 21, 2014, CMS listed 338 ACOs operating under Medicare with 13,865 participants operating within an ACO, with increased filings of notices of intent to submit an application for ACO status filed in 2014. Long-term planning is important, as an ACO applicant must go through an application and start-up process that takes time and capital and requires the provider to commit to participate in the ACO for a number of years.

As a healthcare lender, it is important to know what your borrowers are doing to react to this shift in population and the growing urgency to build partnerships for more fully integrated comprehensive care. If your borrowers are not taking action to become a member of an ACO, they may quickly find themselves unable to compete with ACOs who are working exclusively within their own ACO networks.

A provider included in a hospital's network will receive referrals. However, an operator excluded from networks, due to poor planning or poor performance will struggle in securing referrals and face the daunting task of building and maintaining census. Becoming part of a hospital-led ACO is not the only option, as CMS reports that hospital-led ACOs make up 49% of ACOs while ACOs consisting of networks of individual practices make up 57% of current ACOs.

Thus, if the borrower is not joining an ACO, it should at least be running in parallel with them, or loosely affiliating with entities along the care continuum.

Q.2 What actions are you taking to build your technology and electronic data infrastructure?

Commentators and operators alike agree that the unprecedented innovation and change in seniors care has made data gathering, reporting, and analysis the key differentiator for healthcare providers seeking to remain relevant in the ACA universe.

Not only are providers required to adopt and implement meaningful use of electronic health records (EHRs), under the American Recovery and Reinvestment Act, but use of electronic data to quantify the quality and cost-effectiveness of care provided by the provider will be necessary for the provider to compete in the marketplace.

Lenders need to understand how borrowers are building their technology infrastructure and network. They also have to address the capital needs required to expand these on-site technology functions. Healthcare owners and operators today must be data-driven organizations. They must have the ability for robust interconnectivity through all internal business applications, including rent roll, care management, sales, and operations, as well as across a spectrum of care providers.

Data provides the empirical indicators to help a borrower's decision making and can provide competitive advantage in its financial success. Many operators now build their strategic focus around rigorous and detailed analysis of data. The critical metrics can include financial, economic, operating, sales and outcome-based data.

HealthIt.gov has identified the effective use of EHR as having the ability to analyze data in a matter that allows the provider to improve quality, safety, and efficiency in services, to reduce health disparities, to engage patients and their families, to improve care coordination and population health and to maintain the security of patient health information. The most effective operators today and in the near future will organize data so that it is efficient and usable. This will help ensure better quality standards and provide the reporting mechanism to show improved outcomes.

Improving quality of care is the starting the point for a provider's use of EHR. The benefits of an integrated electronic health records platform include seamless transition of care and better resident outcomes, maintenance of accurate medication lists and physician orders, accurate billing, and improved resident care.

With the use of integrated EHR platforms, decisionmaking on the ground will be driven more by analysis of vital signs that identifies early warning signs of possible changes in conditions. An electronic service plan can then be developed from this assessment. This documentation will provide a quality check for utilization of the recommended labor models and quantify both scheduled and unscheduled care.

HHS has reported on certain providers who have implemented this data driven platform, including examples of doctors who have installed alerts within their EHRs to identify high-risk factors that trigger the need for additional screenings or preventative care. For example, HHS has written about a physician in Kansas who developed an alert system within her EHRs to send notifications for patients at high risk of developing colon cancer. The EHR alerts led to the discovery of three patients with colon cancer in the earliest phases and the early detection allowed for treatment of those patients without radiation or chemotherapy. Providers who are capable of demonstrating this type of use of EHR data to improve care will be well positioned in the new healthcare industry that focuses on quality based results.

While improved resident care is foundational, this data will drive operators in building successful relationships across the continuum of care. The optimal way to become a value-added partner in a referral network is to demonstrate the ability to effectively and efficiently manage and share data across the network. That will enable partnering providers to benefit from the efficient use of EHR. Providers in the industry must be able to provide an assessment at any given moment, while balancing the social and clinical needs of the patients.

This involves capturing real-time data regarding a resident's need in order to respond more rapidly to changes in condition. For example, with real-time data, the borrower can partner with hospitals looking to reduce readmission penalties. Hospitals will be very judicious in where they discharge patients and the long-term care facility must be able to prove their success in avoiding readmissions under similar conditions. This data will help build more responsive staffing models and ultimately, bring revolutionary change in how services are priced. The key driver of this shift, however, is a fully implemented technology infrastructure that provides a clinical management system for enhanced quality of care.

Delivering the type of data that is required in the new healthcare environment is a costly undertaking for the post-acute provider. However, it is critical to the entities' survival. The post-acute provider must be able to coordinate care across a network continuum through electronic information exchange and demonstrate how its use of EHR can contribute to the quality of care its residents receive across the spectrum of providers.

The healthcare lender must be attuned to its borrower's progress on upgrading and integrating its electronic infrastructure. This is especially true for the small to medium-sized operators as the cost of capital to build the data infrastructures can be cost-prohibitive.

The alternative, however, can result in a downward spiral of referrals and census, and subsequent default on loan payments.

Q3. What strategies have you implemented to reduce readmissions?

A driving focus of health reform is to reduce hospital readmissions. Centers for Medicare and Medicaid Services (CMS) will rank hospitals based on reimbursement rates for several conditions with significant penalties and repercussions for those hospitals in the lower quartiles on the readmission scale.

Hospitals will partner with post-acute care providers who are a positive alliance partner in reducing readmissions. This means that post-acute care providers will need a game-plan to ensure quality of care to be top referral source.

In recent studies of readmissions, the top 25% of post-acute providers have a 14.8% readmission rate. The median is 19.5% and at the 75th percentile it is 23.4%. It appears clear that to be a winner in the continuum, the post-acute provider will need to manage readmissions to less than 15%.

With the penalties provided by CMS for readmission rates, a lender needs to understand the quality of care provided at its borrower, beyond the standard state regulatory survey review.

Above merely meeting the regulatory minimum, the long-term care provider must strive to be a clear leader in care and in minimizing hospital readmissions. If the borrower can display excellence in this area, they likely will thrive in the ACA world of healthcare.

Additionally, top providers must have a way to present their readmission rates to their prospective alliances. Hospitals are developing post-acute scorecards to determine where to discharge patients in order to keep readmission to a minimum, and numerous service providers in the industry have developed programs that measure and quantify readmission data to compare readmission rates across risk factors and other demographics.

For example, in 2013 the American Health Care Association unveiled a data tracking program for its skilled nursing facilities and long-term care members to help them and those in the industry who they want to partner with compare readmission rates. Such technology is important as CMS’ current assessment of readmission rates fails to take into account high-risk populations and provides a two-year lag-time in data.

At present, a hospital may discharge patients to dozens or hundreds of places. However, in the new healthcare environment, they will identify the top partners to discharge patients to reduce readmissions to the hospital and having the proper programs to quantify and analyze the provider’s readmission rates will be key to allowing the post-acute provider to solidify its position in marketplace.

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Part 2 of this article—"Can your healthcare borrowers handle Obamacare?"—will consider six additional critical questions that healthcare lenders must ask their borrowers. It will also address some overall conclusions to effectively protect and preserve your position with defaulting healthcare borrowers.

About the authors

Tim Lupinacci is a shareholder in the Birmingham office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. He chairs the firm’s Financial Institutions Advocacy Practice Group. His practice primarily focuses on representation of financial institutions and CMBS special servicers in financial distress, restructure, and bankruptcy and workouts of defaulted commercial loans.  He appreciates the assistance of Justin Stephens, an associate in Baker Donelson’s Baton Rouge office, in an early draft of this article.

Renee Decker is an associate in the Fort Lauderdale office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. Her practice primarily focuses on representation of national lending and servicing clients in creditors rights and bankruptcy matters.