On the Record: Dan Mendelson, CEO and Founder of Avalere Health

The tides of change are rolling in for the skilled nursing industry, and perhaps none is more aware of what is to come than Daniel Mendelson, the CEO and founder of Avalere Health, a business strategy and public policy firm focused on the nation’s healthcare problems.

Senior Housing News recently got a chance to pick Mendelson’s brain about how the industry has handled Medicare cuts and its ability to sustain more under the sequestration; why the long-term, majority-Medicaid census nursing homes will get squeezed out business, and his pick for president—kind of.

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Senior Housing News: You led a session at the NIC conference in March giving your perspective on where the industry is going in light of health care reform/federal initiatives. In a nutshell, what was the session’s most important takeaway for those in the skilled nursing industry?

Dan Mendelson: The most important takeaway is that post-acute care providers need to start operating in a way that is consistent with a care-managed environment. They need to understand care management. The paradigm shift is moving from a “silo” system in which a nursing home gets paid to deliver nursing home care, to a more competitive environment in which the nursing home is a cost-reduction tool for a health plan, for an ACO, or even a hospital that is trying to avoid cost. That is the fundamental takeaway.

SHN: Can you talk about the current political scene in terms of the nation’s deficit crisis? Are cuts an inevitable part of health care policy?

DM: We are in a deficit reduction environment in which all providers are targets for payment reductions. That’s going to continue, and it has been the case for some time. The sequestration policy is one example of that. After the election, there will be a broader discussion of deficit reduction whether it’s by a Republican or Democratic president.

SHN: I’ve heard that it might actually be better for the industry if the sequestration does go into effect, because at least the industry will know it’s getting 2% cuts, rather than facing an unknown cut. What are your thoughts on that perspective?

DM: My view is, postponing cuts is good, and taking cuts is bad. Any cut that you can push off into the future, you should do it. It gives you more time to adjust. If the sequestration happens, it’s not going to be the last cut.

It’s always a question of, [A cut] relative to what? There have been some proposals to deficit reduction that have been more intensively focused on nursing homes. The good part about sequestration is that it levels the playing field between nursing homes and hospitals.

If sequestration is pushed off or mitigated, it would be better for the industry.

SHN: What would mitigation look like?

DM: Either Congress decides to do less than what was originally planned, or decides to postpone sequestration beyond when it’s scheduled to start now. These are policies that in this environment are likely– hospitals and nursing homes are pushing hard to mitigate the payment reductions.

SHN: Would it be better for the industry to get a Democrat or a Republican in office?

DM: There are advantages and disadvantages in either direction. The advantages of a Democratic administration is that it’s generally very well aligned with beneficiary interests. Anything that entails more payments out-of-pocket for a beneficiary is something the administration is going to push back on.

The Democrats will talk about deficit reduction, but when push comes to shove they are less likely to adopt policies that really push down on costs. The positive side of a Republican administration is it’s generally a less regulatory regime; it’s generally a regime that values the private sector.

There’s a flip on both sides. It’s incumbent on any provider of post-acute care to work the positives once the election is over.

SHN: Even though there was a lot of uproar after the average 11.1% cuts were announced, it looks like the industry, overall, has managed to mitigate the cuts and keep going. But there are some companies whose first quarter earnings reports weren’t so great, and if reimbursements keep getting cut, do you think the industry can sustainably mitigate the effects and still turn a profit?

DM: No. What’s happening now, is, historically, Medicare subsidized Medicaid extensively. Now, Medicare reimbursements are going down, and it gets harder and harder for the post-acute care providers to run without subsidies.

At the same time, Medicaid payments are going down in many states; many are trying to pay less. Providers are getting squeezed from both sides: Medicare and Medicaid. A number of Avalere studies show that providers are having to reduce the size of their staff and are incurring some sizable losses in operation costs. That will happen increasingly if these trends continue.

SHN: Will the skilled nursing industry end up as short-term nursing/rehab/will long-term nursing home care remain relevant? How would that be affected by hospital readmission penalizations?

DM: Nursing homes are relevant and will remain relevant as a cost-effective substitute for clinical care, and a cost-effective setting in which to do intensive rehabilitation.

The very-long stay nursing homes, that are primarily Medicaid-dependent, are going to be squeezed out of business, because they won’t have any subsidy. A more intensive style of nursing home care will emerge [and will be] enduring, because it’s a cost effective way to provide transitional care.

Nursing homes can be a very integral part of the care transition from hospital to home and to prevent hospitalization. If they reframe the value proposition that way, they will be more attractive. Going forward, it’s going to be the nursing home’s ability to play as a partner to a health system in providing effective health care.

On hospital readmissions: A well-run nursing home can reduce hospital readmissions. Increasingly, nursing homes will need to frame their value proposition around effectively reducing readmission and improving quality for hospitals.

The healthcare system is increasingly oriented toward quality. The entire post-acute sector needs to understand that payors prefer to pay on the basis of quality. To the extent that quality is being improved in nursing homes, that becomes a dominant selling proposition for these facilities.

SHN: Some policy proposals favor more “block grants” for Medicaid funding to the states. Is this a viable plan or not?

DM: The whole discussion of block grants suffers from a lack of specificity. The issue is that the federal government won’t completely abdicate its responsibility in the Medicaid space. It can’t just say, ‘Here’s the money, goodbye.’ The question becomes, how is the money being monitored, tracked, and specified? If you just give money to the state, and you don’t require anything of them, that’s a real problem for providers.

But if you give money to states and hold them accountable for quality, that’s not necessarily a bad thing for nursing homes and the post-acute sector. The devil’s in the details, and you’ve gotta look closely at these proposal.s

SHN: Considering the Medicare Payment Advisory Commission’s most recent report to Congress which discussed Medicare payment margins, will skilled nursing end up being a “break-even” industry?

DM: The problem with MedPAC is it doesn’t care about Medicaid. It’s the Medicare advisory commission. They have the luxury of being able to say, ‘Well, Medicare overpays,’ without acknowledging that Medicaid underpays.

A more appropriate way of looking at the situation is holistically, at both the federal and state government systems: Do they or do they not cover the cost of care that’s being given? As Medicare rates go down, we’re approaching territory where aggregate federal payments are going to be less than costs, and that’s unsustainable.

SHN: Where do you see the government pushing the health care industry?

DM: The reform covers 30 million people, it moves toward quality-based programs, and it favors care management systems. Those are the three fundamental things the system does; it pays for itself by reducing provider payments. That’s been the primary thrust of this administration.

The part of that most relevant to the post-acute care industry is the idea that care transitions and integration are more important.

If there’s a political change in the upcoming election, things will change fundamentally and you’ll have more of an emphasis on patient responsibility, deployment of managed care for dual eligibles, other policies generally favored to the Republican party.

On home health care: There’s been a dramatic expansion of home health services over the past 10 years, and I do expect that to continue. Much of that is critical for keeping patients out of more intensive care settings.

On assisted living: Assisted living can be a useful part of care management and transition. A number of large AL providers have approached us trying to define their place in the integrated system. They’re going to need to prove their value; they can’t just assert it. A lot of analytics will need to be done in order to test the value proposition that assisted living is meaningful.

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